iQIYI Inc

NASDAQ:IQ

Earnings Call Transcript 2021-Q4

[Operator]

Good day. And thank you for standing by. Welcome to iQIYI Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Ms. Chang You [ph], IR Director of the company, to read the opening remarks and the safe harbor statement. Please go ahead.

[Unidentified Company Representative]

Thank you, operator. Hello, everyone, and thank you for joining iQIYI's fourth quarter and fiscal year 2021 earnings conference call. The company's results were released 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; Ms. Vivian Wang, our CMO, Chief Marketing 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, Xiaohui Wenfeng, Vivian, Youqiao and Xianghua will join Mr. Gong and Jun and in the Q&A Session. Before we proceed, please note that the discussion today will contain forward-looking statements made under the safe harbor provision 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 not limited to, those outlined in our public filings with the SEC. iQIYI does not undertake any obligations to update any forward-looking statements, except as required under applicable law. With that, I will now turn the call over to Mr. Gong. Please go ahead.

[Yu Gong, Founder, Director and Chief Executive Officer]

Hello, everyone. Thank you for joining us today. 2021 was a unique year for iQIYI. One year ago, we shared with investors in our shareholder letter that iQIYI deliver its core value producing and distributing premium entertainment content. We believe the premium long-form video content is a fundamental need for human beings, and iQIYI has established solid leadership in this space. We delivered what we said. In the past year, despite turbulence in the macro environment, we still consistently delivered blockbusters quarter over quarter, including My Heroic Husband, Feng Qi Luo Yang and Who is The Murderer, just to name a few, and we continue to run number one in various user metrics according to third-party data. Today, we would like our shareholders to recognize that iQIYI is leading the opening of a new chapter in Chinese long-form video industry, which involves a number of structural changes. The market competition shift from quantity to quality, the operational priority shifts from market share to business efficiency. Everyone within the industry is now taking a more balanced approach that result in higher business efficiency, profitability and positive social impacts. These changes are positive. These changes are the consensus of industry leaders, including iQIYI, and they will help the entire industry to achieve sustainable growth in the long term. These structural changes also brought near-term benefits resulting in a healthy fourth quarter for iQIYI. For instance, we proactively dropped projects that generated low ROI and had limited value creation. Meanwhile, we are more disciplined in investing in the noncore business and initiatives with long payback periods. Our organization become a slimmer and nimbler. We are more focused on our core business than ever, resulting in significant improvement on cost and operating efficiency. The initial results have been very encouraging in the fourth quarter of 2021. The non-GAAP operating loss, a key measure for our business performance, decreased significantly by 45% annually and 52% sequentially, exceeding our expectations. The benefits from these changes will extend beyond Q4. We expect the non-GAAP operating loss to be further narrowed significantly in the first quarter of 2022. Our goal is to reach operating breakeven for the full year of 2022 on the non-GAAP basis, and we hope to reach quarterly non-GAAP operating breakeven as soon as possible. We believe that we are in the right direction in reaching our goal. We will continue to increase our operating efficiency and improve quality of our diversified content portfolio through content innovation, production refinement, industrialization of video production and diversified monetization methods. We firmly believe premium long-form video content is one of the core needs of human beings. Through the execution of our short-term strategy and the rich experience we have accumulated in the industry, we will continue to produce and deliver more high-quality and diversified premium content to expand our member and user base over the long term. Now let's go through the performance of business segments in the fourth quarter and the full year of 2021. Let's start with membership. Our core business strategy remains focused on the three aspects that drive membership service growth: first, increasing average revenue per membership as known as ARM,; second, improving retention of paying members; and the third, continue attracting new members and reconverting inactive members. In the fourth quarter, our membership revenue grew by 7% annually and the full year 2021 membership revenue grew slightly from last year, mainly driven by ARM improvement. For the fourth quarter, monthly ARM was RMB14.16, up 14% annually and 4% sequentially. The improvement of ARM was mainly attributable to more premium services provided for our users, the success of our innovative operating initiatives, and efficient promotion efforts and the successful price adjustment that we rolled out in November 2020. For example, we launched many innovative marketing campaigns for a number of high anticipated content launched in December, such as our original drama series Feng Qi Luoyang and Who is The Murderer from Mist Theater, bringing exclusive perks to our members. Benefiting from the success of last year’s Mist Theater, the membership revenue of Who is The Murderer recorded historical high among all Mist Theater dramas. During the first two months of the quarter, we faced great uncertainty content scheduling and many key titles were delayed towards the end of the quarter. The average daily number of total subscribing members for the fourth quarter was 97 million compared to 102.7 million for Q4 2020 and 104.7 million for Q3 2021. As we launched many premium titles since December, the current number of subscribers is now back at an ideal level. Despite the sequential fluctuation in average daily subscribers for the quarter, we are happy to see that subscriber growth on large screen devices maintained good momentum. The user time spend on TV devices continued to increase, showing the appreciation of content distribution via big screen is growing. This trend presents us a greater monetization potential on big screens. In the future, we will continue to improve the acquisition and retention of paying subscribers through refined operational strategies. And at the same time, the penetration into large screens will be another driving force to the continuous growth of our business. Moving on to overseas business, our overseas business made great progress with user base and revenue achieved significant growth year-over-year. The influence of our overseas platform continues to increase, bringing a wider recognition of Eastern culture amongst overseas users. First, the user base recorded explosive growth and average DAU in 2021 tripled from last year. We saw the best growth momentum in Thailand with annual growth of nearly 700%. Meanwhile, the growth rate in many other regions exceeded 100%, such as countries in the South-East Asia, the U.S., Korea and Australia. Second, the overall revenue growth of the overseas platform was also encouraging. Membership revenue grew by over 40% sequentially in the fourth quarter and over 80% for the full year. Advertising revenue grew by about 10% sequentially in the fourth quarter and over 100% for the full year. And thirdly, continuous releases of hit titles successfully won recognition from overseas user, driving a rapid increase in the ability to continuously expand our user base. During the year, a wide variety of Chinese mainland content such as original and licensed dramas and original variety shows achieved top trend ranking in 14 countries, including Malaysia, Thailand, Japan, Korea and the U.S. Lastly, we continue to improve our platform capabilities and expand cooperations with local partners. We launched our app on Amazon Fire TV and Roku TV in North America and also on many TV devices, such as Samsung, Hisense and LG TV. During the year, we also launched an overseas ad platform to expand our cooperation with overseas brand advertisers and agencies. In the future, we will continue to focus on expanding the scale of our user base and revenue by leveraging the premium content on iQIYI main app and continuous improvement of operation efficiency. We are striving to maximize our monetization capability for our overseas platform. Moving on to advertising. The advertising revenue decreased 10% year-over-year during the quarter, mainly due to the decline in brand ads. The decline in brand ads was mainly attributable to; first, the lack of hit content, both for the dramas and variety shows in the first two months of Q4. Second, weak overall macro environment. Despite the decline in brand ads, we are pleased to see that ad revenue from the Mist Theater doubled in 2021. Highlighting the success and the importance of our vertical theater model strategy. For 2022, we are targeting to secure more key accounts and increased their revenue contribution, driven by continuous content innovation and development of sequels to our success titles. Revenue from performance ads achieved steady growth, both annually and sequentially during the quarter. iQIYI Lite was a major driving force. The operating metrics of iQIYI Lite increased significantly, specifically ad inventory increased benefited from strong traffic increase. The annual growth of performance ad also benefited from the improvement of our ad products as we continue to optimize our algorithm. Moving over to content. We experienced turbulence and faced many uncertainties that directly impacted content launch during the year, and especially in the first two months, of the fourth quarter. As we gained a deeper understanding of the latest industry policies, we are able to better comprehend the boundaries of content production and scheduling. Thus, we proactively managed the process and increased our resilience relative to content scheduling uncertainty. We launched many premium contents towards the end of the fourth quarter. Optimization of the overall content cost is the foremost aspect of our recent operational strategy. For the fourth quarter, the content-related cost ratio continued to improve this ratio as we introduced in the last call. It effectively reflects the operating efficiency of the content we invested in. So far, the ratio has improved over 20 percentage points annually for the fourth quarter as the number of low-performing titles decreased both annually and sequentially. Meanwhile, we have utilized our intelligent production technology to increase our data analytical and forecasting capabilities, which in return increased our content success rate. We believe we have a team of content professionals that have the best industry know-how by executing the aforementioned initiatives, the overall quality of our content team will further be improved. Now, let's go through the key titles during the quarter and in 2021. During the quarter, we ranked number one for the number of new dramas launched in the industry according to Enlightent, and we maintained the leading position in terms of market share of variety show, cartoons and also animation. For the full year 2021, our market share of movies, dramas, variety shows, cartoons, and animations all ranked number one, and the number of new dramas launched was the highest in the industry. One, for dramas, we focused on enriching and diversifying our IP monetization capabilities. For example, we are building the iQIYI Chinese Historic City Universe Franchise, developing content, which is based on the traditional Chinese culture, showcasing the history of rich Chinese culture to the global user through diversified original production. We debuted our first work in the franchise, as the original TV drama Feng Qi Luoyang, which generated immediate buzz among viewers. The popularity index of Feng Qi Luoyang broke 9,000 on the second day of launch, become one of the top ranking hit dramas that achieved such high index score on our platform. In the future, we anticipated to develop a series of production under the same concept to expand as a franchise. For the second season of Mist Theater, a number of titles were debuted in fourth quarter further enforced its brand influence among viewers. The monetization capability for the Mist Theater series has become an important growth driver for our membership service, Who is the Murderer generated the highest membership revenue among all titles. The success also attracted more advertising budget to our platform and demonstrated great flexibility in working with advertisers under the vertical theater model. Two, for variety shows, we continue to explore new genres and had received praise from both industry professionals and audiences. For Q4, our original production, the Super Sketch Show maintained solid number one in user time spend for the variety genre. Three, for films, we continue to build our cloud cinema during the quarter, aiming to further expand monetization possibility and establishing a new online ecosystem for film distribution. For example, part of our original films were only released online via PVOD model and the initial success was encouraging. In 2021, we launched a total of nine films under the PVOD model, among which our original film, Northeastern Bro was released in Q4 and was the second best performing PVOD film of the year in terms of viewership and revenue contribution. For the full year 2021, we have launched diversified films in Cloud Cinema across different genres including comedy, action, suspense, thriller and others. Cloud cinema provides an open and fair platform for film distribution, which significantly increases the supply of premium content and give talented content creators better exposure. Thus, achieving a win-win result for both film makers and our platform. For cartoons and animation, we also achieved substantial success in the fourth quarter. We introduced animation, Feng Qi Luoyang Shen Ji Shaonian project within the iQIYI Chinese Historic City Universe franchise and a good example that demonstrates our diversified IP monetization strategy. Its popularity index broke 4,000 within 13 hours of its launch, topping the chart on our platform. Looking into 2022, one for dramas. We will continue to improve the quality of our content portfolio, especially for our premium original production and build competitive barriers for our content ecosystem. The key is enforcing brand awareness, explore the brand value of vertical content and extend the content life cycle by producing multi-season dramas and short series under the vertical theater model. We will continue to pursue achievements with our iQIYI Chinese Historic City Universe franchise. We now have three vertical theaters that provides differentiated content and services for our users, namely the suspense and mystery themed Mist Theater, the romance themed Sweet ON Theater, and our new launched comedy themed Laugh On theater. We recently launched Lifelong Journey on January 28, our first key drama for the year, and it has maintained a leading position in terms of effective viewership according to the latest Enlightent data. Two, for variety shows we will maintain our leadership position in this genre and focus on the categories that we have rich experiences with such as mystery style competition games, comedy, music and romance, and we will further innovate and develop shows in sports and our performance competitions to meet the latest user demand. Three, for films, we will upgrade the number of project scales and genres of original films as compared to 2021. We anticipated to have 6 to 9 theatrical releases of our original films. Four, cartoons and animations, we will continue to cultivate and develop our IPs by making serialized productions. For example, our original cartoon Deer Squad is the first original Chinese animation broadcasted in Nickelodeon TV channel. It has become an instant hit and is already under multi-season development. Next, moving on to products and services. In the fourth quarter, iQIYI Lite achieved an outstanding performance across various operating metrics, in particular, peak DAU reached five million during the period, iQIYI Lite helps us in penetrating into lower-tier cities, and we are observing low user overlap between iQIYI Lite and our main app and such overlap continues to decline. The consumption of library content is much higher on iQIYI Lite, showing different user behaviors between these two apps. As for our interest-based community Suike continued to improve and enrich our content ecosystem. For the full year, 2021, Suike contributed about 17% of user time spent on our platform. Interest-based video constitutes one of the very important components of our content ecosystem. And since the cost of the content on Suike is relatively low, it eased our cost pressure to some extent. In addition, traffic generated by Suike contributed to the growth of the performance ad inventory, driving revenue growth. We hope that user-generated short-form videos will attract attention and drive the consumption of respective long-form videos, creating a closed loop for our online video ecosystem, special events in Q4. During the quarter, we optimized the organization structure and created a flatter organization structure that helped us to bring more focus back to our core business and increase the efficiency of our operations. As a result, there was a non-recurring severance costs recorded in the fourth quarter. By optimizing the organization structure, we have assembled a more elite team, which enables us to better focus on our core business and improve operational efficiency. To summarize, we have seen initial positive effects from our cost optimization and organization alignment. Despite the turbulence in the past year, we still maintained our market leadership while dramatically improved our business performances. We will keep enriching and improving the quality of our diversified content portfolio, refining operations of our theater model, seller remodel improving the efficiency of content investment and cultivating a content ecosystem that grows our community culture. In addition, we aim to continue increasing our penetration in different geographies and user cohorts through iQIYI Lite, large screens, and overseas business initiatives, as a result, our fundamentals will continue to improve. Again, our goal is to reach non-GAAP operating breakeven for the full year of 2022 and to reach quarterly non-GAAP operating breakeven as soon as possible. We have strong confidence and looking forward to bring everyone better and healthier iQIYI in 2022. Now I will hand over to Mr. Jun Wang to go through our financials.

[Jun Wang, Chief Financial Officer]

Thanks, Tim. Now let me walk you through our key financials for the fourth quarter. In this quarter, we introduced the concept of non-GAAP operating loss for the very first time. We believe it will help our shareholders to better understand and track our business performances. So, starting with revenues, in fourth quarter our total revenues reached RMB7.4 billion, a solid performance considering macro headwind. Our Membership Services revenue increased by 7% year-over-year mainly driven by the growth of membership ARM, or Average Revenue per Membership. Our fourth quarter ARM increased by 14% annually and 4% sequentially. We expect the momentum to continue going forward. Next, moving to the cost and expenses. With all the initiatives previously explained, the fourth quarter cost of revenue decreased by RMB277 million compared with the same time last year, the major contributor to the narrow of our operating losses. On the other hand, our operating expenses also decreased by RMB125 million, down by 6% year-over-year, along with one-time severance costs. As a result, our fourth quarter non-GAAP operating loss decreased significantly, down 45% annually from RMB941 million to RMB516 million, representing a saving of RMB425 million. Compared with the previous quarter, the non-GAAP operating loss is also narrowed by RMB557 million or 52% sequentially. Heading into the first quarter of 2022, we expect to see further significant improvements in both GAAP and non-GAAP operating losses compared with the fourth quarter 2021. Again, this benefits from our initiatives in cost optimization and efficiency improvement. Our goal is to reach non-GAAP operating breakeven for the full year of 2022 and to reach quarterly non-GAAP operating breakeven as early as possible. As of December 31, 2021, the company had a cash, cash equivalents, restricted cash and short-term investments of RMB4.4 billion. For detailed financial data, please refer to our press release on our IR website. Now I will open the floor for Q&A.

[Operator]

Thank you. [Operator Instructions] The first question comes from the line of Alicia Yap from Citi. Please go ahead.

[Alicia Yap, Citi]

Hello. Thank you. [Foreign Language] So thank you for taking my question. My question is related to the cost and the profitability. It seems like you have successfully narrowed down your loss ratio over the past few quarters. Can management elaborate how the company has managed to effectively lower the operating losses? I mean you mentioned about the full year breakeven time frame. So, is that indicating it's possible that you can even achieve profitability as soon as even second quarter or even the third quarter? Thank you.

[Yu Gong, Founder, Director and Chief Executive Officer]

[Foreign Language] In the fourth quarter, we proactively adjusted our operating strategy, which focuses on optimizing cost and improving operating efficiency to reduce our operating loss overall. The results have been very encouraging, and we also optimize our organization alignment, which will help to reduce our employee cost and also create a flatter operation and more elite team to help us to focus on the core business of iQIYI and also to improve the overall operating efficiencies. On the content side, we are more focusing on the head premium high-quality content and for that aspect, we won't decrease the number of head content, but we will use content-related cost ratio to help us to identify the low-performing content and proactively drop those content investments. Overall, our process for investment, procurement and operations will be refined to overall increase the operating efficiency. We also built a promotional mechanism that focuses on increasing the revenue performance of the library content. It increases the content portfolio utilization also creating more inventory for the advertising side and also prolong the life span of our content as well as increasing the subscriber revenue. And more importantly, for the video industrialization that we've been talking about, whether it's from the short-term and mid-term and long-term perspective, it's a core focus for our area. We'll continue to push for industrialization as it creates efficiency for content production and operations. [Foreign Language] So, the whole premise is to remain stable revenue performance and also remain stable market share as well as traffic, and we will lower the employee cost also trying to reduce the content costs and also the marketing expenses. [Foreign Language] Okay. So, for Q4, as you – all the investors will see, we have reduced our content costs as well as operating expenses and narrowed our non-GAAP op loss by approximately RMB500 million. And these positive impacts will continue to release in the next couple of quarters. As you mentioned about the breakeven timetable, first, I would like to mention that we are committed to our goal for the year. Our goal for the year is being we'll try to reach non-GAAP operating breakeven for the full year of 2022 and to reach quarterly breakeven on a non-GAAP operating level as soon as possible. Yes. Operator?

[Operator]

Thank you for the questions. The next question will come from the line of Thomas Chong of Jefferies. Please go ahead.

[Thomas Chong, Jefferies]

[Foreign Language] Thanks, management, for taking my questions. My question is about the competitive landscape for the long-form video market. Is management seeing any changes that we need to anticipate in 2022? And number two is more about the content production and procurement side. Are we getting more and more rational going forward? And finally, in – on the policy or the regulatory environment side, are we seeing the sector is getting more stable? And what we should expect are any policies that may come out in the future? Thank you.

[Yu Gong, Founder, Director and Chief Executive Officer]

[Foreign Language] Okay. So, for the overall competitive landscape for online video industry, we think, is entering a new chapter. Within this chapter, we focus more on the efficiency aspect, and hoping to reduce our operating loss and increase the profitability. So, this is kind of different compared to the competitive landscape from before. And before, driven by various reasons, the major players are more focused on the quantity of the content versus the quality and et cetera. So – and we think that the operating focus now is back to the operating efficiency is much more healthy as compared to the market share-driven aspect. For the content side, I think for content production, whether it's for the original production, is very different from the licensing content. Overall, the competitiveness within the industry should be relatively softer. Why? Because it – for the process for this is much longer as compared to the procurement for the license content. So, there are various key data or – key points that we can hit among the lines of this whole process. It gives us more leeway in increasing the overall quality of our original production. And third, regarding for the policies, right now, we think it's relatively stable. And as we have better comprehension of the whole online video regulation and industry and regulatory environment, we know the boundary of content production as well as content scheduling. So, the forecast capability increase overall. And that will help in terms of our subscriber growth as well as on the revenue advertising side. [Foreign Language] And in past two or three years our strategy focus has been in expanding our original production, scale and also improving the production capability. So, in 2022, everyone will see our original production capability and as far as the supply will increase significantly compared to before. And I think we now have an industry-leading team and also a good number of highly competitive original production in our pipeline. [Foreign Language] Thank you.

[Operator]

Thank you for your questions. Next question comes from Eddie Leung of Bank of America Merrill Lynch. Please go ahead.

[Eddie Leung, Bank of America Merrill Lynch]

[Foreign Language] So, my question is about the membership growth. We have seen a bit of a slowdown last year probably related to regulation and content issues. Just wondering any outlook for the membership growth into this year and future? Thank you.

[Yu Gong, Founder, Director and Chief Executive Officer]

[Foreign Language] Okay. For our overall member subscriber, we have seen some relatively pressure in growing the overall membership numbers because there's different aspects. One is there's the COVID impact as far as second, the regulatory environment uncertainties and third is our overall video production capabilities. So, all these are the negative impacts that will contribute somewhat to our overall membership growth. And secondly, I think for the overall online video – long-form online video, the user time spend have been decreasing that relatively by two factors for the market, but we want to read that the importance of online video industry, the long-form video, we think, is a core need for human beings. And the importance is irreplaceable. I think for the overall Chinese online video market as well as the users, the market is being more mature, and this is a positive impact and positive factor for the overall industry. And third, for the large screens as we see, namely the iPad, the screens in the cars as well as the Smart displays, the number of screens have been increasing. There are different user behaviors for different screens. For example, for the cell phone, the most frequent use aspect is communication. But versus the large screens, I think the most used feature is for video viewing experience. So overall, this is a very positive impact or factors that would drive a future potential revenue growth as well as the subscriber growth as well as the ARM that we mentioned before. And overall, lastly, for the IP protection, we are seeing better improvement on this front, especially for the long-form video IP protection. So, all these will be beneficial factors to contribute to the overall growth of our revenue in the future. Thank you.

[Operator]

Thank you for the questions. Due to the time constraints, I would now like to hand the call back to the management for closing.

[Unidentified Company Representative]

Thank you for joining us today. Feel free to reach out to us, if you have further questions. Thank you.

[Operator]

That does conclude today's conference call. Thank you for your participation. You may now disconnect the lines.