BEIJING, Feb. 22,
2023 /PRNewswire/ --
Dear Investors,
First, I would like to extend our sincerest gratitude for your
trust and long-standing support. I am pleased to take this
opportunity to share our business updates and some strategic
considerations.
2022 was a challenging year for many, and also for us.
Nevertheless, 2022 was a year of breakthroughs, a miraculous year
for iQIYI, as we completed an iconic turnaround under extremely
volatile market conditions. We made substantial breakthroughs in
gaining market share, upgrading business operations and improving
financial performance. Our long-term commitment to original content
yielded exceptional results. iQIYI's brand perception was elevated,
from "iQIYI can create blockbusters" to "iQIYI is a blockbuster
powerhouse". Particularly in Q4'22, our market share, membership
revenues, operating profits, operating cash flow and free cashflow
all reached record highs. To be specific:
- We significantly improved our ability to produce and deliver
high-quality original content of wide appeal to the public,
enabling us to deliver a continuing stream of blockbusters. Take
Q4'22 as an example: we launched 6 blockbuster dramas in a single
quarter. The time spent by subscribers grew by over 40%
year-over-year and by 30% quarter-over-quarter, which is
unprecedented. In the meantime, we remained the dominant player in
the content business and strengthened our leading position in the
market. According to Enlightent, our market share in the exclusive
drama category increased by 20 percentage points annually and 13
percentage points sequentially.
- Strong content drove strong revenue performance. In Q4'22, our
core membership services business recorded its highest quarterly
revenue, up 15% annually and 13% sequentially. In Q4'22, our
average daily number of total subscribing members was 111.6
million, representing a sequential net addition of more than 10
million. The number of subscribing members as of the end of
December 2022 was 119.7 million,
representing a net addition of over 13 million compared with the
end of September 2022. In the
meantime, the advertising business continued to recover, with
revenue increasing by 25% quarter-over-quarter.
- In terms of profitability, we had a record-setting quarter in
Q4'22. Operating income reached a record high and operating margin
expanded for a fifth consecutive quarter. The strong performance
demonstrated the operating leverage embedded in our business
model.
- We have successfully transformed into a cash-generating
business. In Q4'22, we generated positive operating cash flow for
three consecutive quarters.
It took three things to make a miraculous year:
1. We took one step back and two steps forward by courageously
changing what we could:
By the end of 2021, the long-form video industry had changed
tremendously and no longer blindly pursued market share. Content
quality and profitability were tightly aligned. We were the first
to foresee that these changes would lead to a new stage of rational
development in the entire industry. The focus of long-form video
competition would shift from content quantity to content quality,
and more players would pursue improvements in operational
efficiency and profitability. Our strategic insights urged us to
take actions to optimize cost and increase efficiency and reach
operating break-even. With this shift in priority, we launched a
series of measures. We took one step back by focusing on our core
businesses and downsizing our non-core businesses. At the same
time, since content is the key component of our investment, we took
two steps forward by further investing in premium original content,
leading to significantly improved investment efficiency in content.
Despite noise from the media and the market, we stuck to our
strategy and never blinked.
With these initiatives, we achieved our strategic goals and
outperformed what we promised. We generated operating income of
RMB1.3 billion in 2022, compared to
operating loss of RMB4.5 billion in
2021. Our non-GAAP operating income reached RMB2.2 billion in 2022, a sharp reversal from a
loss of RMB3.0 billion in 2021.
Meanwhile, our cash flow significantly improved.
More importantly, while we saw a major turnaround in financial
performance, premium content flourished on our platform. Our
long-term strategic commitment to original content began to
demonstrate its power, creating a wider competitive moat and
strengthening our dominant position in the industry. Our
sophisticated content production methodology and superior
operational capacity constitute our unique core competitiveness,
and together have enabled us to produce a series of blockbusters.
As of 2022, we have launched 7 dramas altogether in our operating
history with an iQIYI popularity index of over 10,000, with 5 of
the releases in 2022. Of these 5 dramas, 4 were our original
content. In the first quarter of 2023, The Knockout (狂飙) became a
mega-hit, and was the 8th drama to break the popularity index of
10,000. It broke records across every key metric: the speed record
in breaking the popularity index of 10,000, the highest peak
popularity index, highest daily user time spent, largest daily
audience, and highest membership revenue. The Knockout is a true
nation-wide phenomenon. Its success demonstrates that the
production and operation of our original content have entered into
a virtuous circle, releasing a flywheel effect. The stable supply
of premium content drives user growth, improves cost efficiency and
profitability, and supports the company to create more premium
content. Therefore, we firmly believe the success is
replicable.
2. We were resilient and adaptive to the conditions that we
could not change:
About 3-4 years ago, during the bull market, we issued a series
of convertible bonds. Market condition deteriorated in the past two
years, due to escalating geopolitical tensions, the outbreak of
Covid-19 pandemic and the macroeconomic downturn.
Knowing for a fact that we could do little to change the market,
we did everything we could to strengthen the balance sheet and
protect the interests of our shareholders and bondholders. In the
past 12 months, we have completed three rounds of capital raising.
With proceeds of approximately US$1.3
billion, we successfully removed the debt overhang and
significantly improved our capital structure. More importantly,
through this process, we found valuable investors who remained firm
supporters despite market volatility, including Baidu, PAG, Oasis
and many others who are confident in the prospects of iQIYI. Our
experience in the market downturn made us more resilient, and now
that we have a sufficient cash reserve we can focus on business
development for the next 3-5 years.
3. True wisdom – we committed to our vision, focused on
execution, and built a sustainable long-term business:
We stand by our commitment to user interests and premium
content. As mentioned in our last shareholder letter in 2021, we
firmly believe that there is a fundamental demand for long-form
video in the mass entertainment market. Although users may spend
more time on short-form videos (we refer them as "delicious
video"), only high-quality long-form videos can meet users' demand
in consumption upgrade over the long term. As evidence, a growing
number of users enjoyed our premium content and signed up for our
subscription package in 2022, and the strong momentum continues.
Time is our best friend. Our strong commitment to our original
content strategy has secured our market leadership and
differentiated us from competitors. I believe this true wisdom will
support our sustainable development in the long run.
The ability to produce premium content is our core competitive
moat, and we have been consistent in developing our original
content strategy. For 2022, our original drama hits have become the
major contributor in terms of content offering and revenue during
the new release window for hit dramas. We can attribute this
success to our long-term commitment to our original content
strategy. We believe that our capacity for original drama
production is unique, and cannot be imitated easily. There are no
short cuts in creating blockbusters. To get where we are today, we
invested numerous resources, including time, capital, talent and
technology.
We initiated our original content strategy back in 2014, and
made substantial breakthroughs in 2022, after nearly a decade of
persistent efforts. In the past two years, our investment in
original content reached nearly RMB20
billion. Meanwhile, our multi-studio model ensures the
execution of our original content strategy. We have also gradually
established a complex, data-driven and highly efficient
decision-making system that can capture every critical moment in
the content production cycle. As a result, we witnessed the gradual
ramping-up of high-quality original content. Among the key dramas
we launched each year, the proportion of original productions
increased from 20% in 2018, to over 50% in 2022.
In addition, digital technology is the cornerstone of our
strategy of industrializing long-form video production, giving us
an edge in long-term competition. The long-form video production
industry in China is shifting from
the traditional workshop-style operation to industrialized
production. We actively promoted such transformation, and will
continue to invest in this area in the future. For example, our
proprietary production management system serves as an effective
tool assisting our production teams to improve project management
and efficiency, and better control content quality and cost. We
have also applied virtual production technology to content
production. Virtual production eliminates the impact of weather and
location during the filming process, and virtual assets can be used
for many projects. In addition, virtual production helps to bring
forward some post-production and shortens the production and launch
cycles. Virtual assets can be applied to other businesses to create
new revenue streams, such as digital asset operations, IP based
value-added services, the metaverse and more.
We will also keep a close eye on industry opportunities powered
by technical advancement such as artificial intelligence generated
content (AIGC) and other innovative technologies. We will explore
AIGC application scenarios in the long-form video industry together
with our strategic partner Baidu, in areas such as improving
content production efficiency, content distribution and promotion.
We believe our AIGC strategy will unlock even more potential,
further improve our overall business efficiency and generate
greater value.
We are committed to providing users with the most appealing
content, superior viewing experience and diverse benefits for
subscribers. For example, we continued to improve our smart
recommendation system to help users access their desired content as
quickly and easily as possible. We provide industry-leading
immersive content experience through interactive videos, which have
been widely adopted in our drama and variety shows. Special APP
modes were launched for teenagers, seniors and visually impaired
users to meet their unique demands. We continued to expand our
exclusive membership benefit package, including exclusive IP-based
souvenirs, time-limited discount offers and exclusive fan
events.
In summary, we completed an iconic turnaround in 2022 and
created a miraculous year for iQIYI. Looking ahead at 2023, our
goal is to achieve "high-quality growth", focusing on growing both
revenue and operating profit. In order to realize "high-quality
growth", we will continue to emphasize investing in core businesses
while cautiously evaluating new business opportunities. We will
continue to invest in top class premium content, maintain a
high-quality yet diversified content portfolio, and modestly
increase marketing spend while ensuring desirable ROI.
We also suggest that our investors to look beyond iQIYI's
specific achievements, and re-assess the long-form video industry
as a whole. While iQIYI continued to outperform in 2022, during the
year ROI performance for the entire industry recovered quickly,
driven by structural changes, especially a more concentrated supply
of platform-originated content. This will lead to a healthier
industry and every player in the industry will benefit from it.
The future we have outlined will only come through sustained
effort. We will stick to our commitments, and bring higher value to
our users, business partners and our investors. We believe our best
days are yet to come.
Sincerely,
Yu Gong
Founder, Director, and Chief Executive Officer
iQIYI, Inc.
Safe Harbor Statement
This letter contains forward-looking statements. These
statements are made under the "safe harbor" provisions of the U.S.
Private Securities Litigation Reform Act of 1995. These
forward-looking statements can be identified by terminology such as
"will," "expects," "anticipates," "future," "intends," "plans,"
"believes," "estimates," "confident" and similar statements. Among
other things, iQIYI's strategic and operational plans in this
letter contain forward-looking statements. iQIYI may also make
written or oral forward-looking statements in its periodic reports
to the U.S. Securities and Exchange Commission, in its annual
report to shareholders, in press releases and other written
materials and in oral statements made by its officers, directors or
employees to third parties. Statements that are not historical
facts, including but not limited to statements about iQIYI's
beliefs and expectations, are forward-looking statements.
Forward-looking statements involve inherent risks and
uncertainties. A number of factors could cause actual results to
differ materially from those contained in any forward-looking
statement, including but not limited to the following: iQIYI's
strategies; iQIYI's future business development, financial
condition and results of operations; iQIYI's ability to retain and
increase the number of users, members and advertising customers,
and expand its service offerings; competition in the online
entertainment industry; changes in iQIYI's revenues, costs or
expenditures; Chinese governmental policies and regulations
relating to the online entertainment industry, general economic and
business conditions globally and in China and assumptions underlying or related to
any of the foregoing. Further information regarding these and other
risks is included in iQIYI's filings with the Securities and
Exchange Commission. All information provided in this letter is as
of the date of the letter, and iQIYI undertakes no duty to update
such information, except as required under applicable law.
For more information, please contact:
Investor Relations
iQIYI, Inc.
ir@qiyi.com
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SOURCE iQIYI, Inc.