Thank you for standing by, and welcome to the iQIYI First Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Ms. Chang Yu, IR Director of the company. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining iQIYI's First Quarter 2024 Earnings Conference Call. The company's results were released earlier today and available on the company's Investor Relations website at ir.iqiyi.com. On the call today are Mr. Yu Gong, our Founder, Director and CEO; Mr. Jun Wang, our CFO; Mr. Xiangjun Wang, our CCO, Chief Content Officer; Mr. Wenfeng Liu, our CTO, Chief Technology Officer; Mr. Youqiao Duan, Senior Vice President of our Membership Business; Mr. San Ha Yang, Senior Vice President of Moelis and Overseas Business; and Mr. Fan Liu, Senior Vice President of Brand Advertising Business. Mr. Gong will give a brief overview of the company's business operations and highlights, followed by Jun, who will go through the financials. After the prepared remarks, the management team will participate in the 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 U.S. 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 not are 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. I will now pass the floor to Mr. Gong. Please go ahead.

Hello, everyone. Thank you for joining us today. We kicked off the year with a strong first quarter as we continue to execute our high-quality growth strategy and achieved multiple historical highs, in key financials and operational results. The non-GAAP operating income and its corresponding margin both reached a record high with income and RMB 1.1 billion and margin at 14%. The expanding margin is a natural result of high-quality growth. For our Membership Services business, the monthly ARM growth to an all-time high, which is the sixth consecutive quarter of sequential growth, we are satisfied with the program and continue to believe that ARM remains one of the key drivers for unleashing the long-term value of Membership Services. In our Advertising Services, revenue from the performance has achieved double-digit annual growth and is historical high in Q1. We anticipate the momentum to continue as, it directly benefited from the growing adoption of generative AI, which is expected to yield greater returns on investment for advertisers. Content distribution revenue hit historical high as well reached RMB 928 million and grew 27% annually. This clear illustrates that our growing content production capabilities are creating more high-quality content that is recognized by television stations and other buyers. While we delivered impressive financial performance in the quarter, we maintained dominance in content. Data from Enlightent shows that our total viewership across major content categories, such as dramas and movies maintained the top spot in the market in Q1. Notably, in the crucial drama general category, we have held the #1 position for viewership share for 9 straight quarters. Aside from our domestic achievements, we are also excited by the amplified reach and the influence of our content and the brand in the overseas markets. Now let's dive deeper into the performance of core…

Thanks, Mr. Gong, and hello, everyone. We delivered a strong Q1 results with a record high operating profit and corresponding margins include cash flow and a healthier balance sheet. We believe we can utilize more tools to enhance shareholder value over time. Now let me walk you through the key numbers. In Q1, the total revenues were RMB 7.9 billion. Membership services revenue reached RMB 4.8 billion, remained stable sequentially and decreased 13% annually. The annual decrease as previously explained, was primarily due to the high base effect from the same period last year. For online advertising, revenue grew by 6% annually to RMB 1.5 billion. The increase was primarily driven by the growth of performance and revenue, which achieved double-digit annual growth and hit the historical high in Q1, even compared with a high base from the last year. Content distribution revenue also hit all-time high reached RMB 928 million and grew 27% annually. Moving on to cost and expenses. Content cost was RMB 4 billion, down 5% annually driven by our improvement in content strategy and operating efficiency. Total operating expenses was RMB 1.4 billion, down 12% annually primarily due to our discipline in the marketing spending and the reversal of allowance for credit losses. Turning to profit and cash flow. Our non-GAAP operating income was RMB 1.1 billion and its corresponding margin is 14%, reaching historical high. Furthermore, the operating cash flow totaled RMB 938 million, remaining positive for 8 consecutive quarters, reflecting the continuous improvement of our balance sheet. At the end of Q1, we had cash, cash equivalents, short-term investments and long-term restricted cash included in the prepayments and other assets of RMB 7.3 billion in total. Moving forward, we remain committed to creating long-term value for our stakeholders. We aim to continue to generate sustainable profit and cash flow and to further strengthen our balance sheet. For detailed financial data, please refer to our press release on our IR website. With that, I will now open the floor for Q&A.

[Operator Instructions] Your first question comes from Xueqing Zhang in from CICC.

[Foreign Language] Congratulations on the strong results. My question is about the membership business. The company did not disclose the subscriber numbers this quarter. What's the reason for that? And how should we think about the outlook for the membership business in the longer-term?

[Foreign Language]

[Interpreted] The CEO, Mr. Gong just explained why we didn't disclose the sub numbers and ARM because this only partially indicates the progress of our entire business. So disposing the numbers too much in detail, probably would disturb some of the development of our overall business. So for the details, we'll invite Mr. Duan in charge of the membership business to explain further.

[Foreign Language]

[Interpreted] After serious consideration, we decided no longer to disclose the subscriber and ARM data starting this quarter. At the same time, we believe many of you have already noted that there is overseas streaming platform, which will soon cease the disclosure of these data as well.

[Foreign Language]

[Interpreted] Our reasoning is in part similar due to the different rights and pricing associated with various membership products and tiers each user contributes a different economic value, and therefore, to merely reflect business and financial progress, there is a number of subscribers at a specific point in time or over a period is actually incomplete and lacks objectivity.

[Foreign Language]

[Interpreted] Since the beginning of 2022, we have always emphasized that the core goal of our membership business is to maximize long-term membership revenue and in the current stage of development of our membership business, the indicators for evaluating its growth in health are not limited to the performance of subscriber count. So therefore, the 3 drivers to revenue growth, namely ARM, membership lifetime and subscriber scale will ultimately be reflected in the revenue performance. So overall, we believe using membership revenue as the core indicator is the best way to help investors understand the business progress.

[Foreign Language]

[Interpreted] In terms of the content performance, aside from revenue, actually, there are other external real-time indicators that can help investors understand our business performance for example, and including iQIYI's popularity index and third-party data.

[Foreign Language]

[Interpreted] We remain confident in the long-term growth prospects of our membership business. In the future, we will continue to drive the long-term healthy growth of our membership business through measures such as improving content quality and diversity, more optimized membership products and services and also better penetrate both user groups that are not fully served for example, the elderly and youth.

[Foreign Language]

[Interpreted] And last but not least, I wanted to remind everyone that for each company, actually, the way we track subscriber number is -- or the disclosure measures are a little bit different also.

Your next question comes from Maggie Ye from CLSA.

[Foreign Language] [Interpreted] I will translate myself. My question is related to our recently released iQIYI Original premium mini series To the Wonder which is very well rated on Douban currently with 8.8 score and myself is a big fan of it. So I noticed that this drama series represents very outstanding artistic qualities and is very different from traditional commercial productions. I'm just wondering, what's the investment return look like for this type of similar projects? And is this indicative of the new direction for iQIYI's future content strategy?

Thank you, Maggie. We'll invite our CCO, Chief Content Officer, Mr. Xiaohui Wang to answer this question.

[Foreign Language]

[Interpreted] To the Wonder actually has been a very much resounding success. We think it cannot be simply categorized as our drama or commercial drama, rather it also represent a new direction of our innovation and actually fully affirming our belief in emphasizing both content quality and commercial success. Indeed, we received the highest rating on Douban this year for domestic drama series, scoring as high as 8.8, and it also represented a Chinese language series internationally for the very first time at the CANNESERIES, setting a very good excellent start for iQIYI's new macrocosm theaters.

[Foreign Language]

[Interpreted] In terms of content and innovation, we adapted the story from a little release pros and spiked up with light [indiscernible] elements. Actually, this brings new energy and rhythm to the drama with -- for a relatively strong [indiscernible] of quality.

[Foreign Language]

[Interpreted] What's more impressive, actually, is that from a commercial perspective, this drama actually achieved profitability through diverse revenue streams proving that the high-quality content yield not only strong social influence but also substantial commercial potential.

[Foreign Language]

[Interpreted] Coming back to our content strategy, we will continue to balance content quality with commercial value, consistently producing high-quality, diverse and commercially valuable content. We aim to solidify our core competitive advantage in the drama sector while seeking more breakthroughs in other content dramas.

[Foreign Language]

[Interpreted] Regarding our drama strategy, we will continue to consolidate our advantages in the realistic strong and strengthening our reserve of high-quality ancient costume dramas. We are committed to cultivating high-quality diverse content with the aim of gaining the broadest possible recognition from our audience.

[Foreign Language]

[Interpreted] Our CEO, Mr. Gong just added, actually, content strategies, cost control is very, very important and just namely to the one that actually had a very good cost control. So that's why commercial aspect, it performed very well in this.

Your next question comes from Thomas Chong from Jefferies.

[Foreign Language] [Interpreted] My question is about online advertising. Can management comment about the advertising outlook in 2024, in particular, performance-based advertising. On the other hand, can management comment about how AI benefits our advertising business?

Thank you, Thomas. We will invite our CTO, to answer this question related to Performance Act.

[Foreign Language]

[Interpreted] Performance ad has indeed achieved considerable growth in the first quarter. Actually, in the first quarter, the ad revenue reached an all-time high contributing to over 40% of the total advertising revenue, and we expect to continue to see strong annual revenue growth in Q2 and also throughout this year. And also, we found that the application of generative AI has effectively driven the growth of our performance ad business compared to brand advertising, the impact of generative AI on performance ad actually is more significant and still puts tremendous potential to drive future ad revenue growth for us. And this is actually reflected in a few -- several ad [indiscernible].

[Foreign Language]

[Interpreted] Wenfeng actually mentioned the 3 aspects. First, in terms of ad material production efficiency, advertisers can use this AI to independently and automatically generate a wide range of image and video ad materials, increasing production efficiency and lowering cost for advertisers. And second, regarding the quality of material production, generative AI helps industries to create high-quality materials that coincide with high-quality video content on our platform, making apps more native and resulting in better campaign performance. And third, in ad placement by relying on upgraded model architecture and evolving ad placement strategies, we can optimize ad performance to make ad placement more precise and personalized helping advertisers achieve better results while enhancing the monetization efficiency of user traffic.

[Foreign Language]

[Interpreted] Moving forward, we will continue to leverage generative AI capabilities to help advertisers to track high-quality users, achieved on top [ earning ] delivery synergy and also reinforce the valuable exposure and enhance the advertising effectiveness. And looking at the performance by industries for Q2, we are optimistic about the development of sectors, including e-commerce, online services, gaming industry and the fast-growing sectors such as for dramas, which we believe will bring more opportunities for performance ad.

[Foreign Language]

[Interpreted] We will invite Mr. Wu Gang, who is the Senior Vice President of Brand ad business to add on the performance for the brand ad.

[Foreign Language]

[Interpreted] Okay. For Q2, Q2 actually is the peak season for brand advertising. And with the enhanced supply of variety shows in the quarter, we anticipate a recovery in brand advertising, both sequentially and annually. And for this full year's outlook, we remain cautiously optimistic attitude towards the brand advertising business for the entire year. And looking at the industry's perspective, we are bullish on the food and beverage, medical services and telecommunications industries. We -- in general, we believe the future growth in brand advertising will still revive on the development of domestic brand advertisers.

[Foreign Language]

[Interpreted] We think the rapid increase in Smart TV penetration rates will bring more opportunities to the advertising -- the brand advertising business, helping advertisers to deeply engage with the highly commercially valuable home scenarios. And currently, actually, we have industry-leading user coverage on the large screen.

Your next question comes from Lincoln Kong from Goldman Sachs.

[Foreign Language] [Interpreted] So my question is pretty straightforward to ask about our future strategy, especially what are the areas the management are focusing on for this year and for longer-term.

[Foreign Language]

[Interpreted] our CEO, Mr. Gong is answering this question. So in the short-term, actually, we will continue to improve our business operational efficiency to enhance team capabilities and including strengthening the business fundamentals and also for the financial perspective to improve the profits and cash flows.

[Foreign Language]

[Interpreted] So from the mid- to long-term perspective, the very first one is to consistently enhance the quality and diversity and supply of stability of our premium content.

[Foreign Language]

[Interpreted] And second, for generative AI, we will apply more broadly and more deeply and into contemplation and operations to increase our efficiency.

[Foreign Language]

[Interpreted] Third is to utilize all means to fight piracy.

[Foreign Language]

[Interpreted] The fourth one is to improve the quality of our domestic market operations. And in terms of overseas business, we'll invest, I will say carefully and then to properly invest into those markets.

[Foreign Language]

[Interpreted] In terms of future growth, actually beyond our relative [ mature ] businesses, for example, the membership business and also the advertising business, we will utilize the generative AI and virtual reality. These innovative technologies to explain to new business opportunities, such as franchise staff, including also both online and offline.

[Foreign Language]

[Interpreted] And in the future, we will also both better serve to demographics. For example, the elderly and the children by adopting products design and content production to meet the needs, also to enhance their viewing experiences and very niche content preferences. For example, for elderly to increase their accessibility to content viewing and also for kids content to provide them more safe and reliable content.

There are no further questions at this time. I'll now hand back to management for closing remarks.

Thank you, everyone, for joining the call today. And then if you have any questions, feel free to reach out to the IR team. Thank you.

Thank you. Bye-bye.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.