Ladies and gentlemen thank you for standing by and welcome to the iQIYI's Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I must advise you that this conference is being recorded today, 22 February, 2019. I would now like to hand the conference over to Dahlia Wei, Director of Investor Relations. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and thank you all for joining iQIYI's Q4 and full year 2018 earnings conference call. The Company's results were released earlier today and are available on the Company's Investor Relations website at ir.iqiyi.com. On the call today are Dr. Yu Gong, our Founder, Director and CEO; and Mr. Xiaodong Wang, our CFO. Dr. Gong will give a brief overview of the Company's business operations and highlights; followed by Xiaodong, who will go through the financials and guidance. After their prepared remarks, we'll hold a Q&A session. Before we proceed, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC. iQIYI does not undertake any obligation to update any forward-looking statements except as required under applicable law. With that, I will now turn the call over to Dr. Gong. Please go ahead.

Hello, everyone, and thank you for joining us for our fourth quarter and full year 2018 earning call. We delivered another quarter of solid growth. Total revenues reached RMB7 billion, up 54% year-over-year. We ended the year with total revenues of RMB25 billion, up 52% year-over-year. Throughout the year we continued to generate growth across various key operational metrics including subscribers, engagement levels and time span. The number of total subscribers reached 87.4 million as at the end of 2018, representing a 72% year-over-year growth. Our membership business continued to be the main engine of our growth with revenues increasing 76% year-over-year to RMB3.2 billion during the fourth quarter. This again was driven by growth of the number of subscribers which recorded a net addition of 6.7 million sequentially and 36.6 million year-over-year. The significant growth was primarily a reflection of our premium content which is clearly driving subscriber's conversion and stickiness. Our self-produced drama series including Tang Dynasty Tour, The City of Chaos and Original Sin performed well in the fourth quarter. In addition movie content also played an important role in driving subscribers' growth. We released a number of popular theatrical movies on our platform shortly after they hit the box office over the summer and the national holiday in October. These movies included, Hello Mr. Billionaire Dying to Survive and the Project Gutenberg among others. Our joint membership program with JD.com continued to make good progress during the quarter. It helped contribute a steady inflow of annual subscribers. We also deepened our partnership with China Mobile. We launched our combined membership plus mobile video data package with its video streaming app MIGU. Recently we also extended our joint membership program with Ctrip where iQiyi Diamond VIP and QIYIGUO annual members can enjoy certain priority travel services from…

Good morning, everyone. Let me go through our financial highlights. Starting on January 1, 2018, iQIYI adopted ASC 606, a new revenue accounting standard that nets value added tax from the revenue and cost of revenue line. To increase the comparability with 2018 numbers - 2017 numbers for today's discussion have been adjusted net of VAT. For the fourth quarter of 2018, iQIYI's total revenue was RMB7 billion, up 55% year-over-year. Total revenue in 2018 was RMB25 billion, up 52% year-over-year. The increase was primarily driven by a strong growth of our membership service thanks to our premium content especially our original content titles as well as our various operational initiatives. Membership services revenue for the fourth quarter were RMB3.2 billion, up 76% year-over-year. Membership service revenue in 2018 was RMB10.6 billion, up 72% year-over-year, which was driven by the strong growth in the number of drivers which reached 87.4 million at the end of 2018. Online advertising revenue for the fourth quarter was RMB2.2 billion, up 9% year-over-year, primarily attributable to the growth of brand advertising business. Online advertising revenue in 2018 was RMB9.3 billion, up 21% year-over-year, primarily driven by our innovative advertising solutions and the high quality content offering, especially our original content. Content distribution revenue for the fourth quarter was RMB522 million, up 137% year-over-year. Content distribution revenue in 2018 was [RMB2.2] [ph] billion, up 92% year-over-year. The increase was driven by a number of premium content titles we distributed. Other revenue for the fourth quarter was RMB1.1 billion, up 129% year-over-year. Other revenue in 2018 was RMB2.9 billion, up 105% from year 2017. The increase was driven by a strong performance across various business lines. Moving on to the cost of revenues, our cost of revenues for the fourth quarter was RMB8.5 billion, up 100%…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Thomas Chong from Credit Suisse. Please ask your question

Hi, good morning. Thanks management for taking my questions. My question is about the 2019 outlook, given that we see our subscribers is growing very well, I just want to see how we should think about the subscribers growth as well as other business segment like advertising, content distribution and others because we see content distribution and others are also performing very well as well as the trend in content cost? Thank you.

[Foreign Language] [Interpreted] I will first start from the revenue side. We remain optimistic about the membership business in - on '19. We would like to reiterate that we think the net additions in this year would be pretty much similar as the net additions we achieved in year '18. I think there are two major drivers behind that. One is, we are producing more and more original content and the - not only the quantity is increasing, but also the quality is improving that drive a lot of free users to become paying subscribers. And secondly, overall, the Chinese internet users are getting used to the paying habit and they are more appreciating the premium content that bring the entertainment experience to them. So it's very common for them to become - get used to the paying habit. And secondly, on the advertising side, we are cautiously optimistic about advertising business. Start with brand advertising because brand advertising is the majority of our advertising revenue and in-feed is a small part of the advertising. On the brand side, we believe we will keep slice - the more market share from the TV advertising side because advertisers are keeping shifting their budget towards the video platform. However, because of the macro head winds and the fact that you are all aware of, we think that the growth rates will not be as high as the previous years. That's for brand ads. For the in-feed ads we have two major observations. One is, we think the industry wise the supply of inventory is growing and on the other hand, the feeding demand is not growing that much. So there is the potential pressure for the feeding price. And secondly, as we mentioned before, we are doing some cleaning up for our…

Got it, thank you.

Your next question comes from the line of Eddie Leung of Merrill Lynch. Please ask your question.

Good morning, guys. Just a follow up question on your comment about content spending, so as the market content costs coming down, how would that affect your strategy in content purchases? Would you have more saving or increase the volume of contents to be purchased than produced? And then just a quick question on the subscription business, could you comment on the retention rate you have seen in recent quarter or two, given the faster growth and accelerating growth of your subscriber number in 2018? Thank you.

Dr. Gong Yu will comment on the first question, this is Xiaodong. I'll answer your second one and the churn rate of subscription business remain in, I think, almost the same as the previous ones. I think slight improvement we can see that. And so I don't think the increase on the subscriber base has anything like say negative impact on the churn rate.

[Foreign Language] [Interpreted] For the content purchased actually most of the content we plan for 2019 was - the ballpark was already purchased in year '18, so and actually the licensed content is pretty much saturated in 2018. So now we are planning for 2020 that means the purchase of volume in 2019 will not grow that much in this year versus 2018. And you are looking beyond, if you're looking at the purchase volume of 2020 versus 2019, we actually are seeing a slight decrease in volume for the purchased content. On the self-produced of the original content, on the other hand, we are seeing very clear obvious increase in volume in year '18 versus '17 and if you look at this year versus last year or even year 2020 versus 2019, now trend will continue to increase because this is our strategy - direction for us.

Thank you. Thank you very much.

Your next question comes from the line of Ella Ji from China Renaissance. Please ask your question.

And thank you for taking my question. First, I wanted to follow up with the discussion of content cost. Can we just talk about that on a cash flow basis instead of on the P&L basis? So on cash flow basis, if the total purchased content, volume may go down moderately and unit price is also going down, shall we expect the cash flow spending for content in 2019 will be much smaller than 2018? And then secondarily - yeah, just quickly on the - regarding the regulatory environment. So I wonder if Dr. Gong can further comment on the - currently we understand that the entire entertainment industry sort of slowed down dramatically because of a stronger regulation. Also the celebrity pay ceiling, so Dr. Gong do you expect this will be a temporary situation or do you think this will likely be a structure change? Thank you.

Yeah, this is Xiaodong and I'll answer the first question and Dr. Gong will comment on the second one. So you're right, on the licensed content definitely you will see some improvement on cash flow side because the volume, and Dr. Gong just mentioned in year 2020 will decrease and the price will decrease, so you expect the cash flow we spend on licensed content side will decrease. However, does not necessarily mean the total cash flow - total content costs will improve a lot of because as we discussed before, the we increase the percentage of original content actually the cash flow will deteriorate because you have to pay up for all the original content because nobody else will pay for that. So in all I would expect probably slightly improvement on major ones I don't think any material improvement on the cash flow side and before Dr. Gong can comment on the second question and I want to do remind you guys, let's stick to the one question really otherwise we'll run out of time. So please, yeah.

[Foreign Language] [Interpreted] Actually there are three major regulatory changes in the past several months. Number one is, before all the content are aired on video platform the platform will be responsible to getting the necessary permission and license for those and now it turns out to change to the content producers who need to apply those permissions themselves. We don't think that's much impact on us because from now on we will be only responsible for the permission for the content iQIYI produced, original produced, so we will not be responsible for the CP's content permission. And secondly, there's a new rule that for the content that was released on the video platforms as the first window content, those content need to not only get a provincial permission, but also need central government permission for those content. So that has some impact on us because - on the industry broadly, because now we will take longer time firstly and then maybe the Central Bureau is more strict than the Provincial Bureau and some part of the content might be deleted or adjusted that's the impact, but the impact is very limited. And thirdly, there is some new rules on short form video content, but that mainly affect the short form video players. We only have limited exposure to the short video, so that impact is on us is also limited. For the question you asked about the cap payment the ceiling of the payment to celebrities. I think that's a very positive for the long term development for the industry because although the number of 50 million cap that we I talked to just now that's only a joint declaration between us and three major platforms and six major production companies that's not actually the government enforcement rules. However, that already set a very widely accepted practice for the industry. As far as I know, there haven't been any violation of that since last summer. So I think that will be a very positive sign and it makes both younger actors and actress to stand out from the old and very established actors and actress. And it’s also such a benchmark effect for those older actors because they cannot afford to not appearing on TV or on our viewer platform for more than one year, so they will gladly accept the roles as well. So I think those will be very positive for the industry and will be a sustainable trend going forward because that's more rationale for that market, it's more fitting for the market conditions. The volume of license content has increased dramatically in 2017 to 2018 because the supply is very big. And now we have a content list of more than 100 dramas on our list. So I think the supply is very sufficient. And even in latter half of 2018, we didn't see any decrease of that supply.

Thank you.

Thank you.

And your next question comes from the line of Alicia Yap of Citi Group. Please ask your question Alicia.

Thank you. Good morning management and congrats on the solid results. I have a question on the advertising. So reading your advertising revenue, what is the rough percentage of contribution coming from the creative ad solutions that are pre-committed by the advertiser for your self-produced content? So if we exclude this creative ad solution, what could be the growth rate for the traditional pre roll ad revenue for this quarter over the past couple of quarters? Thank you.

This is Xiaodong. I think for those innovative advertising solutions, and as we've said, it represents over 50% of the ad revenue for original content and for licensed content because it's very difficult for us to embed those innovative solutions in the licensed content produced by a third party. So basically, as you already know, the licensed content still account for the majority of the total content library, so it's not that big, but in some - like quarter - it varies from quarter to quarter. For example, in some quarter we released one or two hit variety shows that will give us like the jump of the package you asked. So I just I can only give you a wide range. I think those innovative ad accounts for, let's say, 20% to 40% of that total ads revenue. That's just a rough range because it varies from quarter to quarter.

Okay, thank you. Sorry.

Next question?

I'll move on to the next question. So the next question comes from the line of Binnie Wong from HSBC. Please ask your question.

Hi, thank you management for taking my questions. So my question is on the advertising revenue growth, if you look at the nice growth, the strong growth in the membership services, of course, that proves the - our premium content is actually one of the industry leading is industry best, right? But how come like if you look at the advertising revenue growth we see a sequential decline? So besides the macro reasons, is there any way that in 2019 that we will be put -- when we put, like the sponsorship, the advertising solutions, we in advance be able to raise our pricing. So just like success of Yanxi Palace, right, that it hasn't been entirely fully been able to capture in our stronger advertising growth. So in 2019 people -- management has really talked about [Foreign Language] recruiting the advertisers. So how are we seeing any modification changes so we can ensure that we can capture more of the upside when the drama series has been practically doing well? Thank you.

Okay, it's a very long question. I think of it as a long matter in the press release. So let me just probably clarify. First, I think the one major reason for big partners' crucial decline for ads business is not only due to the macro environment actually it has mainly come from the seasonality. The fourth quarter typically is like a slow season compared to the peak season of third quarter. And you also mentioned limited, I’d say, hot content. You're right, Yanxi Palace is like -- is a content for the subscribers. So we did reflect some as revenue, but there is another primary purpose for that. So it's maybe a wrong example. But you're right. Definitely we try to capture all the opportunities for those legacy and hot content or whatever. So basically I think the innovative ad solution is a key driver for brand advertisement in the next few years that's only way I think to outperform the general level of the market. So basically we still believe if we're persisting our new content, we have more like more simplicity than complexity to putting more innovative ads they will have to continue to grow the revenue of advertisement. And also you mentioned something about legacy increases under the house cleaning, [indiscernible] so it's e-commerce related. It's something else but we can explain later for that category. And yes, with these ads, and we expect the recovery will take some time. So basically, I think for the first two quarters this year, we will continue to expanded the customer base which is very important for this increased ads business. We hope to expand the customer base to a more diversified and a more healthy one. We'll hopefully expand the customer base to a more diversified and a more healthy ones and that's the general idea but it will take some - that takes some time. We expect maybe for the second half of this year.

[Foreign Language]

Thank you. I'll move on to the next question. So the next question comes from the line of Tian Hou of TH Capital. Please ask your question.

Yeah, congratulations for good quarter. Thanks for taking my question. So the question is related to the content costs, so on one hand the purchasing costs on absolute dollar wise seems like it's going to be slower than last year. On the in house produced or professionally produced the content or self-produced content seems like it's going to go up. So I wonder on the percentage base that percentage of revenue - is this percentage is going to be flat with 2018 or slightly down compared with the 2018? And also regarding the member payments, so we do see some competition in the market, so do you see the trends of the member payment on the average basis slightly going down, what's the trend is going to be? That's the question. Thank you.

Ladies and gentlemen, this speaker is currently experiencing some technical difficulties, please stay on the line while we address the situation. Your line will be placed on music hold until the session resumes. Thank you. Once again, we are currently addressing some technical difficulties until such time your lines will be on music hold. Please continue to standby, we thank you for your patience. You have the speaker back in the room and you may continue. Your line is open.

Hey, sorry for the inconvenience. I'll just try to answer the last question. If I remember correctly, I think the first one was sent in two parts. The first one is what percentage of like, say what the mix look like between in original content and licensed content from a, like, revenue perspective, and we didn't disclose that number particularly. But I can give you some idea. With said something about the original content account for like 10% of the total content cost versus the licensed content. And we also said that the monetization ability for original content is better than the licensed content. So you can have a rough idea of the revenue percentage of original content as a percent of total content. And the second one is whether the increase of subscriber has negative trends on the ARPU side because of the competition and we don't see that correct because you know actually I don't think pricing is a key driver of this business. I think the content and the user evolution is more important and typical driver, so no we don't see any negative trends on our side.

[Foreign Language] [Interpreted] Dr. Gong would just add some more comments relating to Binnie's previous question. We have two main categories of self-produced content, one is, a variety shows that's for mainly for advertising monetization. For drama series previously we - its majority also targeted to drive membership growth, but not - less concentrated on the advertising business. Going forward, when we developed - when we plan on marketing our self-produced show -- produced drama series we'll be more balanced, the contribution for both such business and advertising business. The example you talked about Yanxi Palace that's not a very balanced example because that show, the video view, the traffic's would really stack up in the second half of the play. So advertisers could not previously, you know, set a very high target for them before the show was aired. I think we can take one more question due to time limit.

Thank you. The final question will come from the line of Karen Chan of Jeffries. Please ask your question.

Great, thank you management for taking my question, so just wondering if very quickly, are we maintaining our full year content cost guidance at 70% plus as percentage of revenue and also are we seeing any negative impact if at all on a scarcity of quality license content when we do procurement as a result of tighter tax inspection on top celebrities in China or top celebrities being much more low profile than they were previously? Thank you very much.

We don't provide official guidance for the content cost, but we do give some guidance on the trends of the content cost in year 2019. We said as content cost - the percent of revenue should be better than the second half of the year and probably slightly better. So that gives a rough idea on the range.

[Foreign Language] [Interpreted] Actually for our pipeline this year or even next year we are very - we have plenty of content lined up with the top celebrities because they are previously signed and we have enough of pipeline of them. And secondly, if you look at our self-produced contents with those new actors and actress limited pay of RMB15million, I think one or two years later they will already be a new generation of stars. So we are very confident in that. Thank you

Thank you.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating and you may all disconnect.