Record Profit in 4Q22 Conference Call: iQIYI's Double Income Growth to Continue

iQIYI 4Q22 and Full-Year Financial Results Conference Call Summary

I. Management Report

2022 is a year of extreme external challenges, but it is also a year of significant transformation and meaning for iQIYI. Particularly in the just-ended fourth quarter, the company achieved historical highs in market share, membership revenue, operating profit, operating cash flow, and free cash flow.

The company released six hit dramas this quarter, with member playback time increasing by more than 40% year-on-year and 30% quarter-on-quarter. Fourth-quarter membership revenue reached a historical quarterly high, a 15% year-on-year increase and a 13% quarter-on-quarter increase.

As of the end of December 2022, the number of subscription members reached 120 million, a net increase of more than 13 million from the end of the previous quarter. In addition, the advertising business continues to recover, with quarterly revenue increasing by 25% quarter-on-quarter and a 7% year-on-year decline, slowing down.

1. Profit Performance

The fourth quarter was a record-breaking quarter - operating profit reached a historical high, the profit margin achieved growth for the fifth consecutive quarter, and Non-GAAP operating profit was RMB 979 million, an 87% quarter-on-quarter increase, with a profit margin of 13%. The strong financial performance demonstrates excellent operational capabilities of the business model. The fourth-quarter free cash flow was RMB 840 million, a 4.7 times quarter-on-quarter increase, and the company has achieved positive free cash flow for two consecutive quarters.

The excellent performance in the fourth quarter is not accidental and is a starting point and a signal for the next 1-2 years. The driving force behind current and future success is the company's ability to produce and provide high-quality and hit original content.

The company launched the original drama "Kuang Biao" which broke records in every key indicator: the speed at which it broke the ten thousand popularity index, the highest peak of the popularity index, the highest user duration and the highest daily audience and membership revenue.

2. Core Competitiveness - The ability to produce original dramas that cannot be easily replicated

There is no shortcut to creating hit shows. In order to achieve today's achievements, the company has invested a lot of resources, including time, capital, talent, and technology. The company initiated the original content strategy as early as 2014, and after nearly a decade of unremitting efforts, it achieved substantial breakthroughs in 2022.

In the past two years, the company's investment in original content has been nearly RMB 20 billion. At the same time, the multi-studio model of the company ensures the execution of the original content strategy. The company has also gradually established a complex, data-driven, and efficient decision-making system, which can capture every critical moment in the content production cycle.

Within the company's key dramas launched each year, the proportion of original works increased from 20% in 2018 to more than 50% in 2022. In 2022, original content accounted for more than 60% of the hit shows, contributing more than 60% of the revenue. The total subscription of original content in the fourth quarter increased year-on-year, and the company has gained structural advantages that other participants find difficult to imitate.

3. Release of Debt Pressure In the past 12 months, the company has completed three rounds of financing, raising a total of US$1.3 billion.

4. Outlook for 2023

Looking ahead to 2023, the company aims to achieve high-quality growth and focus on achieving double growth in revenue and profit. To achieve high-quality growth, the company will continue to emphasize investment in core businesses, while prudently evaluating new opportunities, continue to invest in top-quality content, maintain a high-quality and diversified content portfolio, and invest in marketing and membership services with high ROI.

The company will also closely monitor industry opportunities driven by technological advances such as AI-generated content (AIGC) and other innovative technologies, and explore the application of AIGC in the long video industry together with strategic partner Baidu, including improving content production efficiency, content distribution and promotion. It is believed that the AIGC strategy will release more potential, further improve overall business efficiency and create greater value.

5. Specific business performance

1. Membership services:

In this quarter, the revenue of membership services reached 4.7 billion yuan, a new high for a single quarter, with a year-over-year increase of 15% and a quarter-over-quarter increase of 13%.

The daily average number of total subscriptions is 112 million, with a net increase of 10.6 million quarter-on-quarter, and the total number of subscription members as of the end of December 2022 is 120 million, with a net increase of 13.5 million compared with the end of September. The structure of members has also been further improved, with a significant increase in the proportion of annual subscribers. It is believed that a higher annual package subscription rate will help to improve long-term commercial performance.

The ARM of the fourth quarter was 14.17 yuan, up 2% from the previous quarter. For membership business, the company is committed to long-term revenue growth. It is believed that there is a lot of room for development when continuing to improve content quality and deliver more value to users. In the short term, the company chooses to optimize the growth of subscriber base and the duration of membership continuation in its strategy, so that more people can enjoy high-quality content.

2. Content supply:

In the fourth quarter, the company continued to lead the market with its share advantages. According to CSM data, iQIYI's effective playback of all episodes and member episodes ranks first.

In terms of variety shows, iQIYI ranks first in effective playback of variety shows with programs such as "The Adventure of the Tone".

In 2022, five big hits that started to gain popularity would be released in a regular rhythm and at stable intervals, and users could watch the latest high-quality dramas on iQIYI anytime and anywhere.

The company still maintains its leading industrial-grade content production capabilities in China. Among the top ten domestic dramas with the highest scores on Douban in 2022, seven were exclusively broadcast by iQIYI and four were original productions of iQIYI, including the original dramas "Police Honor" and "The Wind Blows Half a Summer".

In 2023, the company will maintain its strong momentum and continue to create more original works. The company will not lower its content creation standards and will launch a series of original dramas and variety shows, such as "Dangerous Lover", "Long Road of Life", "I Am a Detective", "Longbridge", "Cute Detective Agency", etc., and continue to strengthen the synergy between dramas and variety shows. 3. Advertising Business:

The company's advertising business has also recovered, achieving revenue of RMB 1.6 billion in online advertising business in Q4, a 25% QoQ growth and a 7% YoY decline, outperforming expectations.

In Q4, the brand advertising revenue achieved double-digit growth MoM while the decline YoY continued to narrow, which was better than expected. The driving factors behind the MoM growth were:

1. high-quality dramas and variety shows attracted more advertising budget;

2. the relaxation of domestic epidemic prevention measures promoted the recovery of the advertising industry, increased the confidence of advertisers, and thereby boosted the demand for advertising services;

3. Strong growth in advertising revenues in Internet services, communication, and medical services.

Looking forward to 2023, the Company believes that the relaxation of the epidemic situation will fully support economic recovery, and has confidence in the future prospects of brand advertising. Effect advertising achieved both QoQ and YoY growth in revenue, driven by personalized advertising in e-commerce, Internet services, and online gaming sectors. For advertising clients, the Company can effectively help advertisers establish and improve brand value. It is believed that iQIYI will continue to win the recognition of its core users. The Company will focus on revenue growth, similar to Netflix, by continuing to implement the "low-price + advertising support" model based on iQIYI speed version, and develop corresponding subscription products. It is believed that iQIYI speed version will continue to drive traffic to the platform and promote advertising revenue growth.

1. Technology and Products:

The Company will continue to explore opportunities related to the AIGC field. The Company believes that the combination of high-quality entertainment content and cutting-edge technology will continue to empower iQIYI and further improve the efficiency of content production and distribution.

On February 15, the Company announced extensive cooperation with Baidu in the AIGC field, and both sides will invest heavily in the AIGC field. Regarding the application of AIGC technology, it is expected that this technology will be first applied in some content distribution scenarios of Baidu. This cooperation will accelerate the research and development pace in the AIGC field and it is expected that this technology will have more application scenarios in the future.

In Q4, iQIYI speed version achieved breakeven for the first time, and both YoY and QoQ revenues grew well. The Company will continue the monetization process of iQIYI speed version. In addition, the new "advertising-supported" low-price subscription package launched in iQIYI speed version has also received widespread praise from users.

1. Overseas Business:

In terms of overseas business, the YoY growth rate of overseas market subscription revenue exceeded 30%, and the growth rates of revenues in the US and Canadian markets exceeded 70%. For example, the original Chinese drama "Qing Qing Daily" topped the charts in multiple countries such as Thailand, the Philippines, Indonesia, and South Korea within just three days. The original TV dramas released overseas in the fourth quarter attracted more advertising budget.

Q&A:

Q1: The performance of "Skate Into Love" is impressive. What are the specific expressions of the content? How to replicate the hit drama "Skate Into Love"? How do you see the long-term space of the membership scale?

A1: The Q1 content performance exceeded the Company's expectations, giving us confidence in iQIYI's ability to continuously produce hit dramas. In the past decade, the focus has been on systematically improving the hit rate of iQIYI dramas, whether it is "Eternal Love", "Qing Qing Daily", "The Bad Kids", "Go Ahead", "My Daughter" or "Skate Into Love", we can see the continuity and diversification of iQIYI hit dramas. Our core competitive advantages come from:

(1) Talent. Through several distinctive studios, we complete the creation of series, attracting the most creative talents in the industry.

(2) We have established a complex data-driven efficient decision-making film and television production management system (covering the entire life cycle of content production).

(3) Strong content operation capabilities. Covering various aspects of content creation, production, promotion, and broadcast.

(4) Intelligent technology. It helps to improve production efficiency and save costs, becoming a powerful guarantee for content production.

(5) A keen insight into opportunities. After years of experience accumulation and rule summarization, we have a relatively obvious advantage in accurately grasping the rules of content creation and the aesthetic preferences of the Chinese entertainment consumption market.

The company is optimistic about future member growth. In December, the number of members reached nearly 120 million, the increase in membership at the beginning of the year has continued to remain high, and is still growing. The membership structure is more optimized, with growth in yearly card and large screen members, improving member viscosity and long-term monetization. The future membership business has prospects in both direct sales and channel sales. In the direct sales market, video membership has become a rigid demand for users. In the channel delivery market, video membership has also become the most favored equity product for partners such as telecommunications operators, Internet services, and finance. With the continuous improvement of iQiyi content quality, it will bring an increase in the willingness to pay and monetization capabilities.

Q2: In 2022, we saw most industry participants reducing costs and increasing efficiency. What is the trend of industry development and company strategy changes in 2023?

A2: The industry has reached a consensus that long-form video content is a rigid demand of users, and in the past few years, some participants doubted this point. From the end of 2021, the industry entered a new stage, and competition became more rational. Industry competition has shifted from winning by quantity to winning by quality. After one year of development, this has been proven to be effective, and rational competition will continue in the future.

iQiyi's creative ability is improving, along with self-made content capabilities of peers. This change will make the content more attractive, attract users to buy memberships, and may also make users buy multiple memberships. These positive changes are all brought about by the improvement of self-made content capabilities.

Q3: How does AIGC apply to the video field, and in which directions? Recently, you also reached a cooperation with Baidu. What are the future landing plans?

A3: By using AIGC technology, we can further expand iQiyi's abilities in creating film and television content, improving production efficiency and quality, and enhancing the user experience. Since the middle of 2022, the company has started to explore the application of AIGC in the video field.

In terms of specific application directions:

(1) Creation. In the future, intelligent production systems can use AIGC capabilities to help film and television practitioners not only activate creativity but also improve efficiency and reduce costs in the script creation process. During the production phase, the intelligent production system will also be able to intelligently register and process scripts through the AIGC's efficient script disassembly and outline extraction capabilities. This not only helps production teams develop better plans, but also provides more valuable information for post-production and marketing, which improves the overall efficiency and quality of content production.

In addition, AIGC can generate a large number of content promotions, videos, copywriting, and materials, thereby enhancing the efficiency and effectiveness of content promotion. This greatly enriches the massive amount of short video content, attracting more users to watch iQiyi's video works. Especially when promoting massive amounts of high-quality content, it plays a driving role and effectively extends the lifecycle of quality content.

Furthermore, AIGC can also produce different cover images for films, thereby enhancing users' personalized recommendation experience. It can also significantly improve the video search experience, such as by providing plot searches, plot Q&A, and recommendation functions, that more effectively and humanely help users find content.

The company will continue to increase investment in the AIGC field. It has announced a partnership with Baidu on February 15, 2023, where both parties will jointly explore the application of AIGC in iQiyi's content creation tools, content promotion, content search, novel creation, and other businesses, further expanding iQiyi's production capabilities in film and television content creativity, production efficiency, and user experience.

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