iQiyi beats profit estimates but leaves subscriber numbers a mystery

Lacking a megahit drama series this time, the Chinese streaming platform logged lower first-quarter earnings but still exceeded market expectations

Key Takeaways:

• The platform’s operating revenue fell 5% in the first quarter and non-GAAP profit dropped 10% from a high base a year earlier
• The streaming service was not able to match the success of online drama “The Knockout”, which screened last year

By Fai Pui

Early last year, a Chinese drama series called “The Knockout” delivered a blockbuster hit for the streaming platform iQiyi Inc. (IQ.US), attracting the biggest audience in its history and boosting the company’s profits. Fast forward a year, and the earnings storyline is more subdued.

Last year’s gritty police drama lived up to its name in terms of audience impact, with 10.79 billion Internet views, the highest since the platform was founded 13 years ago. Without an equivalent chartbuster in the first three months of this year, iQiyi was always going to struggle to turn in a stellar earnings performance.

During the first quarter, the company’s operating revenue fell 5% to 7.93 billion yuan ($1.09 billion) from the same period a year earlier. Non-GAAP profit fell 10% from a year earlier to 840 million yuan. But investors had been braced for disappointing news and the results actually exceeded market forecasts. In an unexpected twist, the platform’s share price surged 12.2% in a relief rally after the earnings release.

Emotion aside, it is worth taking stock of the performance in more detail. After being on a roll for the past two years, the company still managed to log an operating profit margin of 14% for the first quarter and a positive operating cash position. On the face of it the business looks solid, but there are areas of concern.

According to the financial report, iQiyi’s business is divided into membership services, online advertising services, content distribution and other activities including live broadcasting, games and e-commerce. In the first quarter, revenue from online advertising reached 1.48 billion yuan, a year-on-year increase of 5.5%. Content distribution was the fastest-growing segment, with revenues rising 26.8% to 928 million yuan. Revenue from the other businesses combined rose nearly 8% to 718 million yuan.

Below the surface the core business does have a problem. Income from streaming subscriptions, categorized in the accounts as membership services, fell a whopping 13.5% to just 4.8 billion yuan in the first quarter from the same period a year earlier. An even bigger concern is that subscriber revenue was virtually flat quarter on quarter.

Notably, iQiyi said its monthly average revenue per member (ARM) hit a new high in the first quarter, marking six straight quarters of growth. However, the company did not release the actual ARM number. If revenue per subscriber is rising but overall membership income is falling, the logical explanation is a drop in the number of platform users. That could explain why the company has decided to stop releasing data about the size of its subscriber base.

Regarding the decision, founder Gong Yu told an earnings briefing that the subscriber numbers could only partially reflect the state of the membership business. “Overemphasis on the number will adversely affect day-to-day operations,” he said.

Duan Youqiao, senior vice president for membership business, said the decision to withhold the number was made after careful deliberations, asserting that it was neither objective nor complete as a measure of business dynamics. He noted that some overseas streaming platforms had similarly decided to stop disclosing subscriber data, in an apparent reference to the entertainment giant Netflix (NFLX.US).

When Netflix published its first-quarter earnings in April, it said it would stop releasing figures on its paying membership starting from the first quarter of 2025. Explaining the decision, Netflix said it had already achieved sizable profit and cash flow, and that different regional price structures meant individual subscribers had varying impacts on business performance. Going forward, Netflix planned to focus on revenue and operating profit as its key performance indicators. However, Netflix’s reasoning failed to convince investors. The company’s share price fell on concerns that growth was slowing down.

In fact, subscription numbers for streaming platforms do tend to fluctuate with the popularity of their featured dramas. For example, iQiyi’s subscriber base stood at 111.6 million in the fourth quarter of 2022, rising to 129 million members after “The Knockout” was screened last year. The paying audience fell back to 100.3 million in the fourth quarter of 2023, dipping below the membership level in the same quarter a year earlier.

Clearly, subscription numbers alone may not tell a flattering story about the streaming business. With fierce competition among media platforms, iQiyi would struggle to advance far beyond the 100 million level achieved in 2019, market-watchers say.

Three factors could prove crucial for boosting its earnings from here: raising subscription fees, cutting costs and establishing a second growth curve.

Betting on AI

The platform has been raising subscription fees for several years. The cost of monthly membership went from 19.8 yuan in 2020 to 30 yuan in 2022, while the price for an annual subscription rose from 178 yuan to 238 yuan. The company did not officially increase fees last year but screening restrictions and extra charges for advance viewing of some episodes represented disguised price hikes.

Meanwhile, cost-cutting explains how the company has managed to turn a profit quarter after quarter. Operating costs fell 5% in the first quarter while sales, general and administrative expenses dropped by 17%.

The next step is to find a new growth trajectory. For that, iQiyi is betting on artificial intelligence to help it leverage big data to predict the next hits, as well as substantially cut costs.

Gong said the company was already seeing promising results from integrating generative AI into its operations, while AI also fueled growth in online advertising and content distribution in the first quarter. Chief Technology Officer Liu Wenfeng recently noted that AI was already adept at reading scripts and could be applied to content creation and copywriting, slashing production costs.

Recently another drama series has captured the public imagination in China. Co-produced by iQiyi, the mini-series “To the Wonder” presents a family drama set in Xinjiang’s Altay region, with a 9.7 approval rating on the streaming platform. The drama explores the conflict between modern urban life and the traditions of the rural community in Altay. Whether it is a chartbuster on the scale of “The Knockout” remains to be seen. But the show was likely developed and cost-controlled with the help of AI and looks set to yield bumper returns.

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