iQIYI cuts staff to survive

Produced by Radar Finance and | Li Yihui, ed. | Deep Sea

At the close of the US stock market on March 2, Chinese stocks rose and fell, of which iQiyi (IQ. US) closed up 21.50 percent, with shares up nearly 40 percent at one point.

Before the market, iQIYI released the 2021Q4 and full-year financial reports, the company's fourth quarter Non-GAAP operating loss of 520 million yuan, operating loss ratio from 13% in the same period of the previous year narrowed significantly to 7%; for the whole year, in 2021, iQIYI's total revenue was 30.6 billion yuan, non-GAAP operating loss was 3 billion yuan, and the operating loss ratio narrowed from 15% in the same period last year to 10%.

This is the transcript of iQIYI's self-control fees and layoffs. Gong Yu, founder and CEO of iQIYI, said that from the fourth quarter of 2021, iQIYI launched a series of measures to optimize the organizational structure and focus on core business, significantly improving operational efficiency and striving to further achieve operational breakeven in 2022.

Despite the effectiveness of "slimming down", iQiyi's total daily subscription members in the fourth quarter of last year were 97 million, a decrease of 5.7 million year-on-year; at the same time, in the cold winter of Internet advertising, the company's advertising revenue in the fourth quarter decreased by 10% year-on-year.

According to this judgment, when iQIYI was living a hard life, its revenue-side growth dilemma still existed. According to the financial report, iQIYI's total revenue in the fourth quarter was 7.4 billion yuan, down about 0.93% year-on-year; iQIYI's total revenue in fiscal 2021 was 30.6 billion yuan, an increase of 3% over 2020.

This also means that in the face of the double dilemma of loss and weak growth, iQiyi's only broken arm to survive is not enough, how to make the nearly stagnant main business return to growth, is another major problem in front of the management.

The "slimming" measures have been effective

In the fourth quarter of 2021, iQIYI's total revenue was 7.389 billion yuan, although it slightly exceeded the market expectation of 7.305 billion yuan, but compared with 7.458 billion yuan in the same period last year, it still fell by 0.93% year-on-year.

Historical financial data shows that in the past 6 quarters, iQIYI's revenue growth rate has never exceeded double digits, and even recorded negative growth in the third and fourth quarters of last year.

For the full year of 2021, iQIYI's total revenue was 30.6 billion yuan, a slight increase of 3% over 2020. Net loss attributable to iQIYI narrowed from 7 billion yuan in 2020 to 6.2 billion yuan, operating loss also narrowed from 6 billion yuan in 2020 to 4.5 billion yuan, and under non-GAAP, operating loss decreased from 4.5 billion yuan in 2020 to 3 billion yuan.

From the fourth quarter alone, iQIYI's operating loss in the current quarter was 975 million yuan, with an operating loss ratio of 13%, compared with an operating loss of 1.3 billion yuan in the same period of 2020, with an operating loss ratio of 18%.

Under non-GAAP, the company's operating loss was $516 million in the fourth quarter, compared to a non-GAAP operating loss of $941 million, or 13% for the same period in 2020.

However, its fourth-quarter net loss is still on the upward trajectory, reaching $1.8 billion in the fourth quarter, up 20 percent year-on-year from a net loss of $1.5 billion in the year-ago quarter.

Despite this, iQIYI's management is very satisfied. In the financial report, Gong Yu said, "Since the fourth quarter of 2021, we have taken a series of measures to reduce costs and increase efficiency and optimize the organizational structure, and the results are very encouraging. ”

As early as last year's third quarterly report conference call, Gong Yu said that the next focus is on open source throttling, cutting off inefficient businesses and projects, and increasing and trying new monetization opportunities.

Since then, iQIYI has begun to lay off employees and shrink its business synchronously. According to CBN, iQiyi's layoffs since the beginning of December last year have been between 20% and 40%.

Layoffs mainly involve business positions, such as marketing, delivery, channel cooperation, intelligent production, instant, VR business, etc. At the same time, iQIYI's "edge business", such as games and other business lines, is the hardest hit area for layoffs; the main business, such as video business, has a small impact of layoffs.

On the earnings call on the evening of March 1, Gong Yu explained in detail the company's measures to open source and reduce expenditure. In addition to the optimization of organizational structure, it also includes more refined selection and operation in content production, content procurement and content operation.

For head content, iQIYI gets more revenue through publicity; for "bad content" with broadcast effects, it reduces procurement and improves the level of content production. In addition, we will strengthen our operations for long-tail content to achieve greater value.

According to the financial report, the company's content cost in the fourth quarter was 4.9 billion yuan, down 5% from the same period in 2020, thanks to the company's efforts to control costs and improve operational efficiency.

At the same time, after the layoffs, the company's sales, general and administrative expenses decreased by 17% compared to the same period in 2020, mainly due to lower marketing expenses and equity incentive expenses, partially offset by non-recurring employee severance payments related to optimizing the organizational structure.

In addition, in the fourth quarter, the company's R&D expenses increased by 15% compared to the same period in 2020, and the increase was mainly due to non-recurring employee severance payments related to organizational structure optimization.

Under the strong cost cuts, iQiyi's gross margin improved from 7.4% in the third quarter to 11.9% in the fourth quarter, up from 9% in the fourth quarter of 2020 and also higher than the 8.2% expected by analysts.

Gong Yu said that under the premise of maintaining a reasonable market share of revenue share and user-side traffic, the company will reduce the cost of personnel, content and market costs, and take various measures to reduce these costs and expenses.

Membership declined and advertising business cooled

A series of measures to cut corners have narrowed iQiyi's operating losses and the management has seen the dawn of profitability. But iQiyi's predicament is not only perennial losses, but the lack of growth in its main business is another major challenge.

According to the financial report, from 2017 to 2019, iQiyi's net loss expanded from 3.7 billion yuan to 10.3 billion yuan. By 2020, there was a slight improvement, but the net loss still reached 7 billion yuan. Although it will be further narrowed to 6.2 billion yuan in 2021, it is still far from achieving real profitability.

At the same time, iQiyi's main business growth has also nearly stagnated. According to iFinD data from Flush, from 2016 to 2020, iQiyi's revenue growth rate was 111%, 55%, 44%, 16% and 2% year-on-year, respectively.

In 2021, iQiyi's revenue growth rate is still 3% of the single digits, of which the total revenue in the fourth quarter fell by nearly 1% year-on-year.

According to the revenue composition, iQIYI's revenue mainly comes from membership service revenue, online advertising service revenue, content distribution and other revenues.

The financial results for the fourth quarter of 2021 show that in the four major businesses of the above companies, in addition to the growth of the membership business, the other three major businesses are negative growth.

Among them, membership service revenue in the fourth quarter was 4.1 billion yuan, an increase of 7% over the same period in 2020, mainly due to the growth of average monthly single member income (ARM). ARM was $14.16 in the fourth quarter, $12.45 in the same period in 2020, $13.65 in the third quarter of 2021, and up about $0.5 month-on-quarter in the fourth quarter.

It is worth noting that membership revenue has increased due to higher subscription fees paid by users, rather than attracting more paying users.

On December 15 last year, iQiyi announced a subscription fee increase. Among them, the continuous monthly subscription is raised from 19 yuan to 22 yuan, the continuous season card is raised from 58 yuan to 63 yuan, the ordinary monthly card is raised from 25 yuan to 30 yuan, and the ordinary season card is raised from 68 yuan to 78 yuan, and the annual card membership fee remains unchanged.

This is iQIYI's first increase in price after the first price increase in November 2020.

The cancellation of advanced screenings has given iQiyi and Tencent Video the confidence to increase prices, but users do not buy it. According to the financial report, the total number of iQIYI's average daily subscription members in the fourth quarter was 97 million, down 5.7 million year-on-year, down 7.7 million from the previous quarter, and fell below the 100 million mark.

Through price increases, core member service revenue has been increased, but the company's other businesses have inevitably declined. In the fourth quarter, iQIYI's online advertising services revenue was 1.7 billion yuan, down 10% year-on-year, and content distribution revenue was 762 million yuan, down 5% year-on-year.

Revenue from other businesses, including literature, live broadcasting, games, comics, movie tickets, light novels, etc., was RMB842 million, down 12% from the same period in 2020.

For the decline in advertising revenue of the second largest business, the company explained that it was mainly due to the delay in the release of quality content in the current quarter and the challenging macroeconomic environment.

From the perspective of the overall environment, the current advertising business of Internet companies is not very sluggish. Since the third quarter of last year, the advertising revenue growth of major manufacturers such as Baidu and Tencent has slowed down to varying degrees.

In addition to being affected by the environment, iQIYI's advertising business has its own limitations. It is reported that iQIYI advertising includes ads within the App, as well as sponsored advertising revenue related to film and television variety shows, which is also commonly known as "advertising implantation".

On February 24, people's daily published an article saying that at present, some implanted advertisements have problems such as ignoring the film and television drama plot and pulling hard sets, and the length of the patch advertisements. This will not only reduce the audience's viewing experience, but also may be suspected of violating laws and regulations, and there is a risk of false and exaggerated publicity and infringement of consumer rights and interests.

The article points out that whether it is from the perspective of protecting the legitimate rights and interests of users or from the perspective of regulating the order of the advertising market, it is necessary to further regulate the implanted advertising.

If there are corresponding regulatory measures in the future, it may bring more pressure to iQIYI's advertising business.

Suffer from the impact of short videos

On the conference call, in response to analysts' questions about the competition pattern of the long video market, Gong Yu said that the domestic long video industry has entered a new stage, which is characterized by the pursuit of efficiency, the pursuit of loss reduction, and the ultimate pursuit of profitability, rather than the previous pursuit of market share and rapid growth.

The implication is that iQIYI will abandon the strategy of burning money for the market in the past, and instead start to start intensive farming, more rational management, and pursue economic benefits.

In this context, the company's management has given a rough profit schedule, to strive to achieve non-GAAP operating profitability for the whole year of 2022, and to achieve single-quarter non-GAAP operation profitability as soon as possible.

However, even if iQiyi wants to show profitability to investors, the drastic changes in the market environment are not good for long videos, especially long videos have been challenged by short videos as never before.

As Gong Yu said, the total length of the long video market is declining, which has become an objective reality and has been going on for some time.

Analysys data shows that from 2019 to 2020, the proportion of short video applications increased from 27.39% to 33.73%, and the proportion of long video applications decreased from 34.21% to 30.45%.

In addition, according to the "2021 China Online Audiovisual Development Research Report", as of December 2020, the scale of online audiovisual users in the mainland reached 944 million, of which 873 million were short video users, ahead of comprehensive video.

Moreover, the erosion of long videos by short videos has not stopped, and long videos that have lost traffic are no longer in the center of the Internet. Coupled with the bottleneck in the growth of paid members, revenue growth has also stagnated.

Some analysts believe that for iQiyi, it may be possible to achieve the goal of profitability through continuous cost reduction and fees, but losing growth space will also lose its attractiveness to capital.

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