Gong Yu's letter to investors: 2022 is the year of iQiyi's breakthrough and a landmark reversal

Rakuten on February 22

iQIYI (NASDAQ:IQ) today released its unaudited fourth quarter and full year results for the year ended December 31, 2022. Total revenue for the year was 29 billion yuan, and revenue in the fourth quarter was 7.6 billion yuan.

In 2022, iQIYI's operating profit based on non-GAAP financial measures (hereinafter referred to as non-GAAP) was RMB2.2 billion, or an operating margin of 7%, of which non-GAAP operating profit for the fourth quarter was RMB979 million. Four consecutive quarters of profitable operations.

As of December 31, 2022, the number of iQIYI members rose to 120 million.

Gong Yu, founder and CEO of iQIYI, today released a letter to investors, saying that 2022 is a year of breakthrough and miracle for iQIYI, and the company has successfully achieved a landmark reversal in a highly volatile market environment. iQIYI has successfully transformed into a company that generates positive cash inflows.

Gong Yu pointed out that iQIYI's 2022 performance further verifies the company's content flywheel effect, and content production and operation have entered a virtuous circle, that is, "stable supply of high-quality content - driving member growth and cost efficiency optimization - driving profit improvement - producing more high-quality content". Therefore, iQIYI firmly believes that such success can be replicated, and it can continue to produce better content beyond itself in the future.

Entering 2023, iQIYI's goal is "high-quality growth". Under this strategy, the company aims to achieve both revenue and operating profit growth, and in order to achieve high-quality growth, the company will continue to focus on the development of iQIYI's core business, while rationally investing in new businesses; Focus on increasing investment in head content and maintaining a high-quality and diversified content portfolio; Under the premise of ensuring efficiency, appropriately increase market input.

Gong Yu also advised investors to take a longer-term view of iQiyi's achievements and re-examine the entire long-form video industry. In 2022, while iQIYI continues to lead the industry, the return on investment across the industry is also recovering rapidly, which is the result of structural changes in the industry, especially the more concentrated supply of platform-led original content. This will make the industry healthier and everyone in the industry will benefit from it.

The following is a letter from iQIYI founder and CEO Gong Yu to investors:

Dear Investors,

First of all, I would like to express my sincerest gratitude for your trust and long-term support. I am excited to take this opportunity to share with you our business changes and strategic thinking over the past year.

2022 has been a challenging year for many people, especially for iQIYI. However, 2022 is also a year of breakthroughs and miracles for iQIYI, and we have successfully achieved a landmark reversal in a highly volatile market environment, achieving qualitative leaps in market share, operating performance and financial performance. Our long-standing original strategy has been effective. We have realized the transformation from "iQIYI can create explosive models" to "iQIYI is a blockbuster manufacturing camp".

Especially in Q4, we achieved our best performance in terms of market share, membership revenue, operating profit, operating cash flow and free cash flow.

 Our ability to produce high-quality original content in mass production has been significantly improved. Take Q4 2022 as an example. We launched 6 blockbuster dramas in one quarter, driving an unprecedented increase of more than 40% year-on-year and 30% month-on-month in member duration. At the same time, our content market share remained absolutely ahead and continued to expand in Q4, with our solo drama market share increasing by 20 percentage points year-on-year and 13 percentage points month-on-month, according to Yunhe data.

 Strong content performance leads to strong revenue performance. In the fourth quarter, core membership revenue reached its highest quarterly revenue on record, with year-over-year growth of 15% and 13%, respectively. The average number of daily subscribers reached 112 million, a net increase of more than 10 million sequentially. At the end of December, the number of retained members reached 120 million, a net increase of more than 13 million from the end of September. Advertising continued to recover, up 25% sequentially.

 In terms of profitability, operating profit performance reached a record high in the fourth quarter, with operating margin increasing for the fifth consecutive quarter. This fully validates the operational leverage in the business model that we have repeatedly emphasized. While revenue is growing, profits are growing faster and margins are increasing.

 We have successfully transformed into a business that generates positive cash inflows. In the fourth quarter, the Company's operating cash flow was positive for three consecutive quarters.

We believe that iQIYI's miracle year is mainly due to three things:

1. Take a step back, have the courage, and try to change what we can change:

Back at the end of 2021, the overall long-form video industry has undergone tremendous changes, no longer blindly pursuing market share, and tightly tying content quality and profitability as never before. We judge that industry competition is about to enter a new stage of rational development, and the focus of long-form video competition will shift from content quantity to content quality, and improving operational efficiency and pursuing profitability will become the common demand of more and more industry players. Based on this judgment, we took the lead in making adjustments in the market, formulated the strategic goal for 2022 as "reducing costs and increasing efficiency, open source and reducing expenditure, and achieving breakeven at the operational level", clearly changing the strategy from "market share first" to "profit first", and launched a series of measures. On the one hand, focus on the main business, cut or shrink non-core businesses, and reduce unnecessary input.

Although we have endured tremendous pressure from public opinion, industry pressure, and capital market pressure, we have adhered to our strategy and have not wavered. On the other hand, since content investment is the most important cost component of iQIYI, we are more focused on increasing the investment in the head original content and reducing the investment in content with a low input-output ratio, which greatly improves the efficiency of content investment.

This enabled us to exceed our strategic objectives. Our initial goal is to achieve a full-year 2022 non-GAAP operational breakeven. Through its efforts in the past year, iQIYI achieved an operating profit of RMB1.3 billion, compared with an operating loss of RMB4.5 billion in the same period last year. Non-GAAP operating profit was RMB2.2 billion, a significant reversal from last year's loss of RMB3.0 billion. At the same time, our cash flow health continued to improve, turning positive and improving significantly, gradually approaching the level of non-GAAP operating profit.

As of Q4 2022, we have had positive operating cash flow for three consecutive quarters and positive free cash flow for two consecutive quarters.

What's more, while the financial performance has reversed significantly, we are pleased to see the platform's outstanding works continue to emerge. Our long-standing original strategy is starting to pay off, helping us build a solid competitive barrier and form an absolute industry lead. Mature and efficient content production methodology and strong operational capabilities enable us to create high-quality content in batches.

By the end of 2022, a total of 7 dramas in iQIYI's history had exceeded 10,000 in popularity value, and there were 5 in 2022, of which 4 were iQIYI original content. In the first quarter of 2023, we ushered in the phenomenal hit drama "Crazy", which is also the 8th drama with a popularity value of more than 10,000. All indicators of "Crazy" have broken the historical record of iQiyi's platform: iQiyi's popularity value has exceeded 10,000 at the fastest speed, and its peak popularity, average daily playback duration, average daily number of users, and membership income all rank first in the history of the platform, making it a veritable national phenomenon.

This further validates our content flywheel effect, and content production and operation enter a virtuous circle, that is, "stable supply of high-quality content - driving membership growth and cost efficiency optimization - driving profit improvement - producing more high-quality content". Therefore, we firmly believe that this success is replicable, and we can continue to exceed ourselves to produce better content in the future.

2. Be calm and resolute, and face what we can't change:

Back 3-4 years ago, when the capital market environment was good, we raised funds in the open market in the form of convertible bonds. In the past two years, due to unstable international relations, the epidemic, macroeconomic weakness, etc., the entire capital market has shown huge fluctuations.

Even so, we still do our best to find a way to break the game. In the past 12 months, we have completed three rounds of financing, raising a total of nearly US$1.3 billion, successfully resolving the debt problem and achieving a significant optimization of the capital structure. The financing not only brought valuable capital reserves to iQIYI, but more importantly, in a highly volatile market environment, it helped us find investors who still firmly supported us, including Baidu, PAG, Oasis and other investors who did not want to be named but also believed in iQIYI's future.

The most recent financing occurred in January 2023, and we seized the best time window in the market to complete the public market additional issuance, while doing our best to protect the interests of investors, we achieved a significant optimization of the capital structure, laying a solid foundation for the company's long-term development. Based on the above efforts, we have successfully turned "can't do" into "can", which allows us to be more relaxed and focused on the company's development in the next 3-5 years in the future.

3. Dedicate yourself to action, adhere to faith, turn things around with true wisdom, and ensure the long-term development of the company.

The interests of users and quality content are our firm beliefs. We always believe that long video content is people's rigid demand, although short video (we call it "delicious video") occupies more user time, but high-quality, more thoughtful film and television content, must be the long-term goal of user video consumption upgrade. As proof, we see that with iQIYI's explosion in content performance this year, more users stay on our platform to watch premium content and pay for it.

In Q4 2022, the average number of daily subscribers reached 112 million, a net increase of more than 10 million from the previous quarter. At the end of December, the number of retained members reached nearly 120 million, a net increase of more than 13 million from the end of September, and the current membership growth momentum is still strong. Time is our best friend. It is the long-term adherence to the original content strategy that ensures iQIYI's market leadership and differentiation. This is the true wisdom that we believe can sustain the long-term growth of the company.

When it comes to content, we know that quality content is our core competency, and we are unwavering in our original strategy. Up to now, iQIYI's original content, especially popular original dramas, has become the main force of our content supply and revenue contribution. Since the success of the original strategy is attributed to long-term persistence, intensive capital investment, long-term cultivation of talents, and the continuous accumulation and innovation of technology to ensure the continuous output of explosive content, it cannot be easily copied.

We started large-scale original work in 2014, achieved a breakthrough in 2022, and worked hard with the spirit of craftsmanship for nearly 10 years, investing nearly 20 billion yuan in original content in the past two years alone. The establishment of multiple studios is the guarantee of the successful implementation of our content creation strategy. At the same time, we have gradually established a sophisticated, data-driven, and efficient decision-making management system for film and television production, which can cover every key moment in the content production lifecycle.

Thanks to this, the contribution of original content has increased significantly, and it has now become the main force of content supply. In the new key episodes released every year, the proportion of original content has increased from 20% in 2018 to more than 50% in 2022.

On the other hand, technology is the guarantee for the industrialization level of the film and television production industry, and it is also an important weapon for our future victory. China's film and television production industry is gradually shifting from the "workshop-style" operation mode in the past to industrialization, which we insist on practicing and will continue to promote in the future. For example, iQIYI's self-developed film and television production management system can help film and television production teams effectively improve project management capabilities, improve content quality and save costs. In addition, we help industrialize content shooting through virtual production technology.

Virtual production is not affected by region, weather, etc., and the same set of virtual assets can be reused for multiple project shooting, which can pre-produce the work and shorten the production and launch cycle. In the future, virtual assets can also be reused to other businesses to create more ways to increase revenue, such as digital asset operation, IP value-added services, metaverse, etc.

In addition, we pay close attention to industry opportunities arising from technological advancements, such as artificial intelligence generated content (AIGC) and other innovative technologies. Together with our strategic partner Baidu, we will explore AIGC's application scenarios in the long video industry, such as improving content production efficiency, content distribution and promotion. We believe that the AIGC strategy will help iQIYI unlock more potential, further improve our overall business efficiency, and create greater value."

We always strive to provide users with the most engaging content, high-quality audiovisual experience, the richest content benefits and membership benefits. For example, we continue to improve our intelligent recommendation system to help users find the most interesting content in the most convenient way; We deliver industry-leading immersive content experiences through interactive video, which is now widely used in our series and variety shows. Special modes have been introduced for teenagers, seniors, and visually impaired users to meet their unique user needs. We continue to expand our exclusive member benefits package to include exclusive IP souvenirs, limited-time discount offers, and exclusive fan events.

All these initiatives helped us achieve a landmark reversal in performance in 2022 and create a miracle year for iQIYI. Heading into 2023, we aim for "high-quality growth." Under this strategy, the company's goal is to achieve both revenue and operating profit growth, and in order to achieve high-quality growth, we will continue to focus on the development of iQIYI's core business, while rationally investing in new businesses; Focus on increasing investment in head content and maintaining a high-quality and diversified content portfolio; Under the premise of ensuring efficiency, appropriately increase market input.

We also advise our investors to take a longer-term view of iQIYI's achievements and revisit the long-form video industry as a whole. In 2022, while iQIYI continues to lead the industry, the return on investment across the industry is also recovering rapidly, which is the result of structural changes in the industry, especially the more concentrated supply of platform-led original content. This will make the industry healthier and everyone in the industry will benefit from it.

The road is obstructed and long, the line will come, the line will not stop, and the future can be expected. Looking forward to the future, we will stick to our faith and create higher value for our users, partners and investors. We still believe that iQIYI's best time is yet to come.

Gong Yu

Founder and CEO of iQIYI

February 22, 2023

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Lei Dian was founded by media person Lei Jianping, if reprinted, please indicate the source.