IQIYI's "Cool-headed growth", with emphasis on "cool-headed" (2Q22 conference call minutes)

The following is a summary of the IQIYI 2Q22 conference call, and a review of the financial report can be found in "IQIYI Is Only Temporarily Surviving"

Key Highlights

1. Non-GAAP operating profit has been profitable for two consecutive quarters (1Q and 2Q) and achieved positive growth rate; operating cash flow turned positive in 2Q; advertising revenue increased by 53% compared to the previous quarter.

2. It is expected that from the late 3Q, the negative factors will gradually subside or even rebound, leading to an increase in the number of members and an upward trend in ARPPU.

Management Discussion and Analysis

[2Q Overall Performance] Due to operational optimization strategies and efficiency improvement, the company achieved three impressive results in a challenging macro environment:

1. Member revenue continued to grow year-on-year.

2. Non-GAAP operating profit has been profitable for two consecutive quarters (1Q and 2Q), achieving positive growth rate, which helped the company better respond to changes in the market environment and have confidence in continuing to execute the "rational growth" strategy.

3. Significant improvement in cash flow, for the first time in 2Q, turned positive in operating cash flow.

[Rational Growth Strategy] Helps the company achieve healthy revenue and profit growth, characterized by the following three features:

1. Pursue growth without relying on excessive cash flow investment, invest more actively in IT core businesses and projects with higher certainty and higher ROI.

2. Pay attention to both revenue and profit, and the profit growth rate should be greater than the revenue growth rate. Massively increasing revenue investment may not necessarily improve operational efficiency. The company will maintain its existing operating structure and improve operational efficiency.

3. Provide users and customers with more high-quality content to create more value.

[Performance by Business Segment] 1. Member Services; 2. Content; 3. Advertising Revenue; 4. New Business

1. Member Services

(1) Business Performance

• Member service revenue of 4.3 billion yuan (YOY+7%).

• The average daily subscription member total during the quarter was 98.3 million. The number of daily subscription members during the quarter, excluding trial members, was 97.7 million.

• Monthly ARPPU increased to RMB 14.53 (YOY+8%), achieving continuous growth rate greater than 8% for 6 consecutive quarters.

(2) Driving factors

• The first driving force: newly released TV-side member services

With stable user accumulation on the TV side, MAU achieved a year-on-year growth of 15% and improved user retention rate through continuous improvement of operational strategies.

• The second driving force: high-quality and diversified content supply

For example, "Police Honor" received positive public opinion, with a Douban score of 8.6, becoming the number one domestic drama in the first half of 2022, and the number of members reached its highest value during the broadcast period. The self-produced reality show "2022 China Rap Peak Duel" successfully attracted 1.3 million members.

• Provide diversified services and benefits to members.
• Make reasonable use of external marketing channels, cooperate with Douyin, and authorize some content to Douyin creators for creation.

(3) Future Plan

In the future, we will continue to improve the originality of content and take more innovative measures to attract more members.

2. Content

(1) Industry Competitive Position: The company maintains a leading position in the industry.

• According to Questmobile, the company's MAU maintains the first place in the long video industry, and the company also maintains the market share of the first place in the effective playback volume caliber. The company's market share in the animation field remains the first place.

• High-quality content provides long-term motivation for the company's leading market position. The ROI of variety shows, animations, children's content, and other aspects realized growth on a year-on-year and month-on-month basis.

(2) Broadcasted Dramas and Variety Shows Performance

• The original drama "Zhu Qing Hao" achieved good ratings, the original movie "Edge Walker" achieved 16 million box office, and the children's content "Music Princess Aimei Li" made a huge contribution to membership growth.

• In terms of original content, one of the company's key strategies is to develop multi-season variety shows and tap the value of IP. In the second quarter, the company broadcasted "2022 China Rap Summit" and "Meng Tan Tan Tan Case 2", both of which continued the high popularity of the previous season.

• The first episode of Xiaodou Theater's "Elite Breaking Squad" introduced an innovative interactive drama mode, bringing the audience an immersive viewing experience, and the Douban score increased from 7.1 to 7.6. The company will continue to explore new ways to meet the preferences of young audiences.

• There are four dramas with more than 10000 popularity values in the iQiyi popularity list, including two dramas released this year, "In the World" and "Cang Lan Jue".

(3) Pipelines

• The company launched a series of high-quality content during the summer to cater to the preferences of young audiences, such as "Genius Fundamentals" and "Twenty Not Confused 2", and the content supply gradually improved.

• In terms of variety shows, the company will continue to innovate multi-categories, including original variety shows "Annual Comedy Contest 2", "Men Who Do Housework 4", and "Folk Songs".

• In terms of animation and children's content, the company will continue to strengthen the differentiation of content and the monetization ability of IP, not only launching new episodes of existing dramas but also launching more new series. The company continues to make efforts in the summer season and hopes to return to the pre-epidemic level.

3. Advertising Revenue

(1) Performance

The epidemic has brought great pressure to all brands in important cities (such as Shanghai and Beijing), but the success of the company's original projects has enabled the advertising business to recover to a certain extent, achieving a month-on-month growth rate of 53%.

(2) Driving Factors

Mainly from the accurate identification of user groups. Secondly, technological innovation is the core value of the company, helping to increase user growth and commercial value. For example, compared with traditional dramas, the average viewing time of interactive dramas is 20% higher.

4. New Business (1) Overseas Members

Overseas member revenue achieved significant YoY growth, thanks to the growth of subscription users. The 2Q broadcasted popular dramas "Young Boss and I", "Seven Days of Loving Me", attracting many users.

(2) iQIYI Speed Version

- The iQIYI Speed version achieved YoY growth in both membership revenue and advertising revenue. The DAU in 2Q exceeded 5 million.

- The statistical data of users' content consumption behavior on the iQIYI Speed Version is somewhat different from the main application. The main App mainly uses brand advertising, so the effect of advertising on the Speed Version supplements its business. The overlap rate of users between the iQIYI Speed Version and the main application further declined in 2Q. At the same time, the content consumption on the iQIYI Speed Version is significantly higher than that on the main application, and has growth potential in terms of user scale and profitability.

(3) Cooperation with Douyin

The company has reached a content authorization cooperation with Douyin, where Douyin users can create content based on some of the company's authorized content. This helps healthy development of both long and short videos, stimulates the creative ability of creators and, at the same time, brings potential users to iQIYI, providing long-term value to iQIYI.

Q&A

Q: 2Q membership evolution trend; outlook on 3Q membership subscription trend; long-term development strategy for membership business?

A: [1] 2Q membership evolution trend

The growth of membership revenue in 2Q met the company's expectations, mainly due to the increase in ARPPU. However, the growth in the number of members was lower than expected due to the following:

1. 2Q is the off-season.

2. There were few new content releases due to the COVID-19 pandemic.

3. Delayed content releases due to audit reasons.

[2] Outlook on 3Q membership subscription trend

The situation has improved significantly in 3Q, thanks to:

1. The summer is the peak season.

2. High-quality content is being released, such as "The Genius Rulebook" and "The Blue Lan".

The company maintains an optimistic attitude towards the growth of membership numbers in 3Q.

[3] Long-term development and strategic direction

From the past three years since the outbreak of the COVID-19 pandemic in 2020, the company has been in an abnormal stage of business advancement. The pandemic has had a certain impact on the company's short-term business. For example, the increase in the number of members can last for 2-3 months, but it also has resulted in more negative effects. The membership business of the company has been in a non-normal, non-stable, and non-sustainable healthy development state for two and a half years. There are many factors for this, such as unstable content supply and more stringent audit due to the pandemic, and a further decline in consumers' willingness to consume.

However, the company believes that the negative impact of the pandemic will gradually decrease in the future. Content supply will gradually recover, and consumers' willingness to consume will also significantly increase. Therefore, the company is optimistic about the medium- and long-term business prospects. The company expects that starting from the later period of 3Q, the negative factors will gradually diminish or even rebound, which will bring two changes: the trend of increasing membership numbers and growing ARPPU will continue.

Q: The company has put forward the concept of "calm growth". Why will profit growth be faster than revenue growth?

A: Calm growth is a strategy formulated at the end of 2021, and the strategy for 2022 is to expand revenue streams, control costs as much as possible and increase revenue. To achieve this goal, the company has taken a series of effective measures. After two quarters of experimentation, the company has discovered some bottom lines and regular rules. The company will increase investment in projects with high predicted efficiency, which have a very high return on investment. This will lead to profit growth higher than income growth. For example, in the first half of the year, the company had a high return on investment in content and membership growth. Increasing investment moderately will greatly increase revenue and profit, and efficiency is high. This is completely different from the previous strategy of boosting revenue and profit by high investment.

Q: Future Plans for the Capital Market

A: The company announced that it has reached a $500 million convertible bond financing agreement with PAG (Leading Asian investment fund with over $70 billion of investment scale, the company is a very active and sensitive investor in the internet media industry). This successful financing round shows PAG's recognition of the company's fundamental improvement. The company has indeed improved its competitiveness, and gross profit margin continues to grow.

Most importantly, the two sides have reached a consensus that video media will have great growth potential in the future and that the value of video media is severely underestimated. This $500 million financing cooperation may be a catalyst for market value revaluation.

The company believes that financing is the first step but cannot solve all problems. The $500 million financing is a milestone, but the company still needs to solve more problems. In this process, the company needs the efforts and support of all partners, including shareholders.

Q: Future Collaboration with TikTok

A: After months of negotiations with TikTok, an agreement was finally reached. IQiyi's contribution was to authorize content with related rights to TikTok and its creators for secondary creation to produce valuable content.

For IQiyi, there are 2 advantages:

1. Drainage, using short videos to bring in users and members for iQiyi.

2. There will be some cash income. There will be multiple cooperation opportunities for traffic acquisition, including content operation and product operation cooperation. The cooperation in operation and product transformation will be gradually implemented in the third quarter.

From a medium to long-term perspective, this cooperation will bring many values:

1. At the industry level

IQiyi and TikTok are both major players in the long and short video industry. The cooperation between the two has actually established industry rules, realizing mutual benefit and win-win development. It can help the platform, users, and partners play a positive role.

1. At the creator level

Provide solutions for legitimate copyright of genuine edition rights to promote the legalization of intellectual property rights of film and television content. It can curb the infringement of short video on film and television content and other long videos, allowing the creators of film and television content to focus on their creations.

1. Long-term value

For IQiyi, the long-term value lies in the fact that high-quality content is more recognized by the industry and users, improving its monetization space. Secondly, it helps IQiyi's potential users get information, and then transfers to IQiyi platform to watch and consume. Risk Disclosure and Statement for this Article: Dolphin Investment Research Disclaimer and General Disclosure