Yu Gong
Hello, everyone. I'm very pleased to take this opportunity to report on our progress in the third quarter and share our views on the business. Through efforts in the first 3 quarters this year, iQIYI has completed an iconic turnaround, with business performance far exceeding the targets we set at the beginning of this year. There are 2 parts to this iconic turnaround: First, we have been growing the non-GAAP operating profit for 4 consecutive quarters, starting from Q4 last year. And for the first 3 quarters this year, we achieved nearly RMB 1.2 billion in non-GAAP operating profit, a sharp reversal from the operating loss of RMB 2.5 billion over the same period last year. This non-GAAP operating profit in Q3 alone exceeded RMB 500 million. Meanwhile, we generated positive operating cash flow for 2 consecutive quarters. Second, our market leadership remains unchallenged, and our market share in September actually hit historical high on the content side. According to Enlighten data, we remained #1 in terms of effective video views for our exclusive dramas, more than our competitors in the second and the third place combined. As for the mobile user metrics side, we were also #1 across core metrics, including user base, user engagement and user stickiness. Our subscriber base has grown from 95.6 million on June 30th to 106.2 million on September 30th, representing a net addition exceeding 10 million. How did we largely improve financial performance while gaining market share? The key is our long-term commitment to original content. We are glad to see that the original content has become a main contributor to our content supply. Among the drama, we launched in Q3, 65% were original content, a historic high. Meanwhile, the hit ratio of our original content improved significantly. As many of you know, iQIYI's popularity index is an influential indicator of content and popularity. Of the 6 blockbuster dramas with a popularity index of over 10,000 in our history, we launched 4 this year, and 2 in Q3, both are original titles. Hundreds of millions of users binge on our original content blockbusters, which drive up user base and a market share, and translate into the huge improvement in our financial results, from loss to major profitability in a single year. Behind these titles is our unique approach to content production and operation, which is our core competitive edge. As such, our iconic turnaround is very difficult for others to replicate, since it is based on our years of expertise and extensive library of original content. With original content as the key to our success, we will continue to execute our Calm Growth strategy. This means seeking value growth points while ensuring overall operating efficiency, enhancing content investment and marketing spending in an appropriate manner. With this strategy, we will continue to provide users with appealing content and superior services, and further drive the healthy developments of our business Now let's go through the detailed performance of our business segments. Starting with membership services. Membership services have always been our most important business segment. We are determined to roll out strategies and allocate resources to support the continuous growth of our membership business. The average daily number of total subscribers in Q3 was 101 million, a net gain of 2.7 million compared with Q2. September was strong in particular. The number of subscribers at the end of September surpassed 106 million, grew by over 10 million compared to June 30th and over 2.6 million compared to last September. We are happy to see that even after summer vacation ended, subscribers continued to grow in September for the first time in the past 4 years, and the average daily subscribers of this September also reached its highest level compared to all the past Septembers. Based on our latest subscriber numbers, the strong momentum continues. Such success was mainly driven by premium content, indicating that users still have strong appetite in paying for excellent story telling. Our core competitive edge lies around the ability of consistently supplying high quality content, discover and produce exceptional original content. Meanwhile, we strategically emphasized on bringing more privileges to members across wider content categories, which led to improved monetization ability of our subscriber base. One important point to note is that the original content has become a major contributor to our membership revenue. In Q3, the top 3 revenue contributors were all original dramas, namely: Love Between Fairy and Devil, Chasing the Undercurrent and The Heart of Genius. Our multi-season variety show, The Rap of China 2022 also adopted earlier access for subscribers, and ranked among the top 5 revenue contributors for the quarter. On a separate note, membership services revenue was slightly below our expectation in the third quarter. This was mainly driven by 3 factors: first, the temporary decline in consumer sentiment in May, June and July due to pandemic resurgence; second, the delay of certain key dramas; and third, the significant reduction of marketing spending as part of our business stress test. Starting from the second half of August, we successfully reversed the trend with a series of premium content releases including Love Between Fairy and Devil, Chasing the Undercurrent, and Thousand Years For You. Also the reasonable increase in marketing spending and recovery in consumer sentiment also contributed positively to strong growth in subscriber numbers. As a result, this September marked as the strongest September in our history. This means, the strong performance of our membership business was not fully reflected in our Q3 results. In Q3, our monthly ARM continued to grow annually, but had small dip sequentially. We offered promotional discounts during summer season to encourage more users to experience our service at a relatively lower price point. We believe the value created by these subscribers will be reflected in the future. Moving on to content strategy and performance. In the past 3 quarters, we achieved significant results in improving both quality and efficiency. Even though we launched fewer titles than last year, we were able to generate more premium works. The performance of our dramas was outstanding in Q3, especially for original dramas, as we had big improvement in areas such as content supply, revenue contribution, success rate, and word of mouth. One of the best ways to understand the success of our content is to understand our commitment to the original content strategy that we set long ago. So, our performance during the quarter was no accident, and is replicable. Our investments in original content over the past years have been productive and bearing fruits. I'd like to share some data: among major dramas launched in Q3, original dramas accounted for 65%, the highest in our history. Meanwhile, the success rate for original content have also increased. Two dramas broke the popularity index of 10,000 in Q3, with 2 more dramas breaking 9,000 score. All 4 were original content. This breakthrough in original content was driven by the unique and effective content methodology we established, which runs through processes from content creation and production to post-broadcasting, powered by a strong team of professionals and supported by a mature and highly efficient operating mechanism First, we focused on improving the content creation and production qualities of our in-house studios. We also have sophisticated supporting teams with highly experienced professionals across different functions backing these studios through the entire process. Second, we have established a mature and highly efficient mechanism running through the whole process, enabling highly efficient decision-making, strict quality controls and optimal content scheduling. The key to this mechanism is a profound understanding of the content industry as a whole, based on over a decade of experiences in the industry. This forms a high barrier that is had to breakthrough in the short term. The breakthroughs in original content have improved the overall quality and influence of our content, giving us absolute advantages as the industry leader. In terms of market share, in September, effective views of our dramas ranked #1, with the greatest lead in our history. Effective views of our exclusive dramas took an absolute lead, more than the sum of competitors in the second and third positions, according to Enlighten. In terms of popularity, we launched the iQIYI popularity index back in 2018, and since then, only 6 titles received a score above 10,000; and 22 titles received score above 9,000. In other words, titles with a popularity index of over 10,000 are considered potential franchise titles, and over 9,000 are household blockbusters. Among the top 6 popular dramas, 4 were released this year, and 2 in Q3. For the first 9 months, a total of 7 dramas broke 9,000. Our content has also received great word of mouth. Users actively discuss, rate and recommend our content on social platforms. On the third-party platform douban.com, 9 of our dramas launched in Q3 received a rating of over 7, the best quarterly performance in our history. The performance was driven by our carefully refined content scheduling based on our content reserve and user demand. For the 2 dramas breaking a popularity index of 10,000 in Q3, Love Between Fairy and Devil tapped into the demand of young generation audience during the summer vacation, it's creative story telling set it apart from other titles in the same genre. Chasing the Undercurrent, although the storyline is oriented to relatively matured users, but well-liked by a wide range of age groups, and with high viewing completion rate. In addition to dramas, we maintained our output of premium content in other categories. For variety shows, the effective views of the multi-season show The Rap of China 2022 was leading the online variety show market in Q3. The second season of The Super Sketch Show has attracted the largest advertising budget among the variety shows we launched this year. In addition, our original animations recorded solid growth in both the number of titles launched and revenues. During the quarter, our IP franchise format also achieved great performance. We launched both the original drama and animation based on the same IP, The Love Between Fairy and Devil, and saw great synergies. Membership revenue of this original animation stayed as #2 on the animation channel during the entire summer vacation, just behind the Japanese animation One Piece. Entering into Q4, we will maintain the strong momentum of Q3 by launching a number of highly-anticipated dramas, including New Life Begins, Wild Bloom featuring top leading actress Zhao Liying, and Unchained Love featured the leading actor from our blockbuster drama Love between Fairy and Devil this summer. We continued to explore new content themes that cater to diversified user demand, such as the recently launched drama series selections targeting female audience. Please also anticipate a good selection of variety shows, children's animations and movies slated for release. Moving on to advertising. Similar to our peers, we fought against macro headwinds and increased advertising revenue by 4% sequentially. For brand advertising, the revenue recovered sequentially and the year-over-year decline narrowed compared with last quarter, reflecting the attractions of hit dramas and variety shows in the peak summer vacation season. We saw sequential recovery in the number of brand ad clients in Q3, as well as recovery of ad demand for international brand advertisers. For performance ads, we saw revenue increases both annually and sequentially. Heading into Q4 and next year, we face the same challenges as our peers, as Q4 is a traditional off season for advertising, and macro recovery takes time to be reflected in advertising budgets. Currently, we expect continuous sequential recovery in advertising business for Q4. For next year, if macro economy recovers and with absence of pandemic resurgence, we shall anticipate to see year-over-year recovery also. Technical innovation has always been part of our core values. We are committed to bringing the best entertainment experience to every user. At the same time, we hope to promote the industrialization of long-form videos to drive the robust development of the Chinese video industry. This ambition is reflected in our daily work as our engineering team focuses on every product detail. A recent example of our approach to product improvement was the optimization of the bullet chat quality and distribution algorithm, which improved the user interaction and stickiness. Average daily number of users that activated the bullet chat feature increased year-over-year in Q3, and the daily average number of bullet chat interaction increased by 50% year-over-year. We also continue to utilize in-house developed tools to improve content production efficiency. The iQIYI video production management system acts as an efficient tool to help production teams. By the end of Q3, the system have been applied to 5 iQIYI original dramas. In addition to improving efficiency and production quality, the system also saves costs and effectively controls budgets. For overseas business, in Q3, we saw healthy growth in membership revenue both annually and sequentially, reflecting the popularity of our premium content and improved operating capability. Premium content launched during the quarter had solid results both in terms of monetization and word of mouth. Hit Chinese dramas on our domestic main app also performed very well overseas, further extending the IP value on a larger scale. Top dramas under our Sweet On Theater brand, including The Love Between Fairy and Devil and Thousand Years For You, had sound performance. Premium content also drove improvements in monetization. For example, advertisers recognized the value of our theater model, and we attracted partners such as Lazada and Realme as title sponsors for Sweet On theater in Thailand. In the first 3 quarters of 2022, we again demonstrated the powerful execution abilities, professionalism, and strong unity of everyone within iQIYI. For 3 consecutive quarters, we outperformed by continuously improving fundamentals, demonstrating our value to everyone. We achieved growth in market share while significantly improving our financial performance. As content is our core competency, we are confident that we will be able to deliver blockbusters on a continuing basis as we have worked out replicable methodologies for both original content production and operations. These methodologies lay a solid foundation for healthy growth. We believe that we have achieved an iconic turnaround in the context of an extremely challenging macro environment this year, and we will continue to deliver values both to users who love our content and stakeholders who are as confident as we are in the prospects of long-form video. Now, I will hand over to Wang Jun for financial details.
