iQIYI: Mediocre performance with hidden concerns? The only advantage lies in cost-effectiveness.

$ iQIYI.US @ Earnings Report # Crazy Earnings Season

iQIYI released its second-quarter earnings report before the US stock market opened on August 12th:

(1) The company achieved a total revenue of RMB 7.6 billion this quarter, a year-on-year increase of 2.6%. It slightly exceeded the market's consensus expectation of RMB 7.47 billion and fell within the company's guidance range for the previous quarter (RMB 7.25-7.65 billion). In the third quarter, during the summer peak season, with a low base from last year, the revenue guidance growth rate is 6% to 12%. However, compared to market expectations, it is slightly conservative. Bloomberg's consensus expectation for third-quarter revenue is RMB 8.03 billion, which is close to the upper limit of the guidance.

(2) In terms of operating losses, although the MoM loss continued to expand, it was better than market expectations. The operating loss in the first quarter was RMB 1.12 billion, a year-on-year decrease of 12.5%, mainly due to increased server costs and operating expenses. The MoM operating loss rate increased to 14.7%, significantly better than the market's expected 18%.

Overall, the second quarter is a slow season for long videos, and iQIYI's development is stable. However, the third quarter, which was originally the "peak season" for sales, may experience a slight cooling in performance compared to previous forecasts due to the consecutive introduction of education regulation, app advertising regulation, internet content regulation policies, and the outstanding performance of competitors in the long video industry.

In addition, Chinese concept stocks are generally affected by the supervision of the US Securities and Exchange Commission and the risk of foreign capital selling off. Especially for iQIYI, whose free cash flow has not shown significant improvement in the short term, the impact on trading needs to be taken seriously.

From Dolphin Research's long-term value judgment on the company, the current stock price is not high, basically corresponding to the bottom range of historical valuation (corresponding to only 1.6 times PS based on the 2021 performance expectations). Considering that many high-quality content will be launched in the fourth quarter, it is advisable to enter at an appropriate price after the short-term regulatory risks gradually dissipate.

On other key operating indicators:

1. Steady growth of members in the off-season, slightly lower than market expectations

Do you remember the impressive growth of iQIYI's members in the first quarter? Although there were also some popular dramas in the second quarter, such as "The Rebel," "Falling in Love with Special Forces," and "Little Accomplishments" that gained popularity due to the "double reduction in education" trend, the increase in users was slightly lower than the expectations of major banks and Dolphin Research (+1.1-1.5 million). The net increase in members was 900,000, and the overall membership reached 106.2 million at the end of the quarter.

Possibly influenced by promotional activities, the ARPU of members declined MoM this quarter, offsetting some of the growth in members. The overall subscription revenue was RMB 4 billion, a year-on-year decrease of 1.3%. Looking ahead to the third quarter, although it is the peak season for summer vacations, the performance of competitors in the industry has been good based on the current viewership data, especially Tencent Video, which may put some pressure on iQIYI's membership growth in the third quarter.

Advertising continues to recover, but be cautious about the impact of regulatory environment on the effectiveness of recovery.

Benefiting from the economic recovery, the progress of content production, supply, and scheduling in the film and television industry has caught up one after another. Regardless, advertisers' willingness to invest has rebounded compared to the same period last year. In the second quarter, iQIYI achieved advertising revenue of CNY 1.8 billion, a year-on-year increase of 15%.

However, due to the lack of educational advertisements and the continued strengthening of Internet advertising regulation guidance by the Ministry of Industry and Information Technology, Dolphin Research will adjust its optimistic expectations for advertising growth in the second half of the year.

Continuous optimization of content cost ratio, with an increase in research and development expenses compared to the same period last year.

The content cost ratio continues to improve due to the increase in the proportion of self-produced content. The overall content cost in the second quarter remained the same as the previous period, but the content cost ratio continued to decrease on a MoM basis, showing a positive trend.

Sales and management expenses remained basically the same as last year at CNY 1.185 billion, a decrease of less than 1% YoY, while research and development expenses increased by 2%. Dolphin Research expects that the increase in research and development expenses may be due to iQIYI's increased investment in intelligent film and television production. From iQIYI's 2B strategy, it is expected that research and development expenses may continue to increase in the future.

Specific content of this earnings report analysis:

Overall performance: slightly better than market expectations, adjustment of performance expectations needed due to regulatory pressure in the education sector in the second half of the year.

(1) Revenue:

Total revenue in this quarter reached CNY 7.6 billion, a year-on-year increase of 2.6%. The revenue slightly exceeded the market's expectation of CNY 7.5 billion, but it basically fell within the upper limit of the company's previous guidance.

The management's revenue guidance for the third quarter of 2021 is in the range of CNY 7.65-8.05 billion, with a year-on-year growth of 6%/12% respectively. However, the base of the same period last year was relatively low, so this guidance is still relatively conservative, especially considering that the market's consensus expectation is CNY 8.03 billion, which is close to the upper limit of the management's guidance. From a historical perspective, compared to market expectations, this guidance is not particularly optimistic.

Data source: iQIYI Earnings Report, Dolphin Research

For long video platforms, adjustments in film and television scheduling are an unavoidable risk, especially for popular films and variety shows that have received high attention in the market. In the second quarter, iQIYI had delays in the release of many originally planned content, such as the mystery series "Meng Tan Tan Tan An", "Strange Script Shark", "Explosive Stage", and the TV drama "North-South Diversion", which were all postponed until the end of the second quarter or even the beginning of the third quarter. Dolphin Research speculates that the reason for the decline in the release of films on iQIYI in the first and second quarters is due to the strict regulation of the education industry, which has essentially cut off the source of education-related advertising sponsorships for TV dramas. In order to attract other advertisers to fill the sponsorship slots, the platform needs to carry out new promotional activities, which in turn affects the release of films.

In addition, the adjustment of film schedules also affects revenue from content distribution.

This can also be seen from the growth situation after the business split. In the second quarter, despite the low base of last year, both advertising revenue and content distribution revenue still showed a year-on-year decline.