【US Stock Decoding】Can't beat Tencent Video? iQIYI's second-quarter performance fell short

Facing the strong competition from Tencent Video and lacking blockbuster hits to boost itself, iQIYI (IQ.US) showed some weakness in its second-quarter operating performance. In the second quarter of this year, iQIYI's revenue was approximately RMB 7.44 billion, a year-on-year decrease of 4.7%; the net profit attributable to iQIYI was about RMB 68.69 million, a significant year-on-year decrease of about 81.2%; the Non-GAAP net profit attributable to iQIYI was around RMB 0.25 billion, a year-on-year decline of 58.5%. Following the disclosure of its performance, iQIYI's stock price plummeted, closing down 15.58% on Thursday in the Eastern U.S. time, hitting a new low since the end of November 2022. Cost-cutting Measures Fail to Halt Decline in Performance As early as 2022, iQIYI shifted its operational strategy from "prioritizing market share" to "prioritizing profitability." After embarking on the path of cost reduction and efficiency improvement, iQIYI has been consistently profitable since the fourth quarter of 2022. In the first quarter of this year, iQIYI's revenue did not grow, but profits increased against the trend, driven by iQIYI's continuous efforts in cost reduction and efficiency improvement in recent years. In the second quarter of this year, iQIYI continued to "tighten its belt," but the cost reduction was relatively limited, resulting in the cost-cutting measures being less effective than before. In the second quarter of this year, iQIYI's operating costs were about RMB 5.7 billion, a year-on-year decrease of about 1.7%; sales, general, and administrative expenses were RMB 0.97 billion, a year-on-year decrease of 1%; research and development expenses were around RMB 0.45 billion, a slight increase of 2%. Overall, in the second quarter, iQIYI's cost reduction efforts were not as significant as in 2022 and 2023, leading to a diminishing marginal effect of profit growth driven by cost reduction. Especially against the backdrop of declining revenue, iQIYI's operating profit and net profit both saw significant declines in the second quarter of this year. For long video platforms, relying solely on cost control to achieve profitability is not a sustainable strategy. The key lies in producing high-quality content to drive steady and healthy growth for the company. Lack of Blockbusters, Tencent Takes the Lead In 2022 and 2023, iQIYI had many blockbuster content that boosted its membership revenue and the number of members, enhancing its profitability. However, in the second quarter of this year, although iQIYI's exclusive drama quantity remained stable, the absence of past hit dramas like "Kuangbiao" and "Changfengdu" resulted in a lack of momentum in the output of blockbuster dramas for the company. In the first half of this year, iQIYI only had the drama "Zhui Feng Zhe" with over 10,000 heat index, while the well-received "Wo De Aletai" did not make it to iQIYI's internal "over 10,000 heat index" drama rankings. At the same time, the heat performance of the two major IP costume dramas that iQIYI bet on, "Huya Xiao Hongniang: Yuehong Chapter" and "Lieyan," fell short of expectations. According to data from Guodu Research Institute, in the first half of this year, while the number of dramas decreased, the number of high-heat dramas saw a significant increase, indicating a shift in the market towards "quality over quantity." iQIYI's "archenemy" Tencent Video has released a series of hit dramas, including "Blooming Flowers," "Walking with Phoenix," "The Story of Roses," and "The Romance of Huanhuan." Benefiting from this, Tencent Video achieved outstanding results in the second quarter of this year, contrasting sharply with iQIYI's poor performance. According to Tencent's (00700.HK) recent second-quarter report, the platform launched multiple popular TV dramas, driving a 13% year-on-year growth in long video paid members to 117 million; the revenue from online advertising business in the second quarter increased by 19% year-on-year to 29.9 billion yuan, mainly driven by the growth in revenue from video accounts and long videos. On the other hand, iQIYI's two main businesses did not perform as well. The second-quarter membership revenue was about 4.5 billion yuan, a 9.1% year-on-year decrease, mainly due to content fluctuations; online advertising service revenue also performed poorly, decreasing by 2.3% year-on-year to 1.46 billion yuan, mainly due to the decrease in brand advertising business and program variety. In terms of core business data, iQIYI has stopped disclosing operational data such as membership numbers since the first quarter of this year, instead focusing on Average Revenue per Member (ARM) as a more important indicator. Previous data showed that iQIYI's daily subscription member scale decreased from 129 million in the first quarter of last year to 100.3 million in the fourth quarter of last year. Analysts believe that under the impact of short video platforms, short drama platforms, and competitors like Tencent Video, iQIYI may face significant challenges in new user and paid member growth. During the performance meeting, iQIYI's management stated that the company's future focus is to expand the membership scale, with the ultimate goal still being to maximize membership revenue. Turning pressure into motivation, iQIYI's founder and CEO Gong Yu stated that full competition in the industry is positive for the development of long videos, enhancing the attractiveness of long videos compared to other entertainment methods and providing valuable opportunities for the company to improve its strategic tactics