In the recent iQIYI First Quarter 2024 Earnings Conference Call, the company announced a record non-GAAP operating income of RMB1.1 billion, marking a significant milestone with a 14% operating margin. The growth was propelled by a rise in membership services, with an increase in average monthly active users, and a surge in revenue from both performance advertising and content distribution, each reaching historical highs. iQIYI, which trades under the ticker IQ, also reported a strong competitive stance in content viewership and a strategic focus on original programming and technological innovation in advertising.
Key Takeaways
- iQIYI achieved a record non-GAAP operating income of RMB1.1 billion, with a 14% margin.
- Membership services grew in average monthly active users.
- Revenue from performance advertising and content distribution hit historical highs.
- Over 70% of key new dramas are iQIYI originals, maintaining the company's lead in drama viewership.
- Generative AI tools have been integrated into the advertising platform, enhancing ROI for advertisers.
- The company is focusing on international markets and partnerships to expand its global footprint.
Company Outlook
- iQIYI plans to drive membership growth by targeting underserved user groups and improving content quality.
- The company aims to balance content creativity with economic success.
- Focus on premium content, operational efficiency, and technological innovation, including generative AI and virtual reality, is a priority.
- iQIYI is committed to creating long-term value for stakeholders and strengthening its balance sheet.
Bearish Highlights
- iQIYI has decided to stop disclosing subscriber numbers, shifting focus to membership revenue as the main business progress indicator.
- The company remains cautiously optimistic about brand advertising, indicating potential market uncertainties.
Bullish Highlights
- iQIYI expects strong growth in performance-based advertising.
- Smart TV penetration is seen as an opportunity for further growth.
- The company is bullish on the food and beverage, medical services, and telecommunications sectors for brand advertising.
Misses
- No specific misses were discussed in the provided context.
Q&A Highlights
- The company discussed upcoming movie releases and content strategies, including new IPs in reality shows and improved animation production capabilities.
- iQIYI emphasized the success of its original series "To the Wonder" in achieving high ratings and profitability.
- Plans to cater to specific demographics like the elderly and children with tailored content were highlighted.
As iQIYI continues to strengthen its market position, the integration of generative AI tools and a robust content strategy have contributed to the company's optimistic outlook. The focus on technological innovation and international expansion underscores iQIYI's commitment to adapting to changing market dynamics and enhancing user experience. With a solid financial performance in Q1 and strategic plans for growth, iQIYI appears poised to navigate the competitive landscape of content streaming and advertising.
InvestingPro Insights
iQIYI's recent earnings call underscored their strategic growth and financial health, but what do the numbers say? According to InvestingPro data, iQIYI's market capitalization stands at a sturdy $4.95 billion USD, reflecting investor confidence in the company's market position. The P/E ratio, a key indicator of a stock's value, is currently at 18.26, with a slight adjustment in the last twelve months to 16.68, suggesting that the company is reasonably valued given its earnings.
The company's revenue growth over the last twelve months has been positive at 9.91%, which aligns with its reported increase in membership services and content distribution revenue. This growth is a testament to iQIYI's ability to monetize its content effectively, a crucial factor for sustainability in the entertainment industry.
InvestingPro Tips highlight that iQIYI is a prominent player in the Entertainment industry and analysts predict the company will be profitable this year. These insights are particularly relevant as they underscore the company's competitive stance and potential for continued profitability, which is crucial information for investors considering iQIYI as part of their portfolio.
For readers looking to delve deeper into iQIYI's financials and future prospects, more InvestingPro Tips are available, including analysis on shareholder yield and debt levels. There are a total of 10 additional tips listed in InvestingPro for iQIYI, which can be accessed with an exclusive offer: use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription at https://www.investing.com/pro/IQ. These insights could provide a more nuanced understanding of the company's financial health and market potential.
Full transcript - IQIYI Inc (IQ) Q1 2024:
Operator: Thank you for standing by, and welcome to the iQIYI First Quarter 2024 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Ms. Chang Yu, IR Director of the company. Please go ahead.
Chang Yu: 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. Xiaohui 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. Xianghua Yang, Senior Vice President of movies and overseas business; and Mr. Gang Lu, 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.
Yu Gong: 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 financial and operational results. The non-GAAP operating income and its corresponding margin both reached a record high with income and RMB1.1 billion and margin of 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 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 anticipated the momentum to continue as it directly benefited from the growing adoption of generative AI, which as expected drilled greater returns on investment for advertisers. Content distribution revenue hit historical high as well reached RMB928 million and grew 27% annually. This clearly 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 enlightened 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 general category, we have held the number one position for viewership shelf for nine straight quarters. Aside from all 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 business segments. Starting with membership services, we are committed to offering our use of superior content, the finest user experience and enhanced a number of privilege and benefits, which we believe will fuel the sustainable long-term growth of our membership services revenue. Our focus extends beyond merely the quarterly subscriber numbers as a revenue result ultimately reflect on the collective component contributing to that performance. With that said, we believe the way we share the development of our membership business should be aligned as well. Starting in Q1 of this year, we will talk reporting the quarterly average subscriber numbers and we will provide updates on key milestones related to subscriber growth as well as they are achieved. In the first quarter, we delivered membership revenue of RMB4.8 billion flat sequentially and down 13% from a year earlier. The year-over-year fluctuation was primarily due to the high base effects created last year with the relief of our megahit, The Knockout. The surge in travel and offline entertainment during the very first Chinese New Year holiday of this year post of COVID, also partially dilute the online activities. Currently, among the various factors contributing to the revenue performance, we are intently focusing on enhanced ARM and extending the life span of each membership, which serves as our principal areas of focus. We remain highly confident in the long-term growth potential of our membership. Our confidence is supported by the success of our ARM strategy, which reflects six consecutive quarters of sequential growth. The strong performance is driven by our ongoing efforts to improve operations in which product offering and enhanced membership benefits, all of which have bolstered the value proposition of our members. Given that our membership fees are affordable and the effective ARM remains modest. We have the opportunity to further refine our pricing strategy emphasizing the exceptional value of our premium content and uplift it. We have been working on improving ARM by introducing exciting services that add substantial value. I take the Express Package, for example, cash purchase for the drama, The Lonely Warrior reached a new high. The Express Package, not only brought in more revenue, but it also increased the popularity of the title. In fact, just one day after we launched this package, the drama hit its peak on IQIY popularity index score. We are making good progress in bringing additional value to our members, while can currently driving revenue and popularity. In summary, our strategy for our membership business involves consistently delivering premium content under streaming -- streamlining operations and making efforts to attract and engage users. We also intend to adapt our membership offering to suit that was user preference and bolster our loyalty program to motivate commitment to long-term premium subscriptions. Such initiatives are designed to foster loyalty and enhance customer life-time value. Moving on to content. Maintain market leadership in key content areas has reinforced our reputation as a diversified and high-quality premium content powerhouse. For nine consecutive quarters, our drama viewership shelves have topped to the industry. The quarter's newly release title highlighted the extensive range and depth of our offering. We achieved meaningful advancements in the realistic genres, distinguishing ourselves from competitors from quality and dramas, infused with varied creative elements. This strategy has successfully broadened our content creation expertise. Original programming remains the cornerstone of our content strategy, IQIYI originals accounted for over 70% of our key new dramas launched in the first quarter covering diversified scenes. In particular, one of [indiscernible] emerged as the first drama in this year and 13th in history to surpass IQIYI popularity index of 10,000, setting it apart from other warm seat shows, more of this historical periodic setting with financial in triage, suspense and other relative elements demonstrates our commitment to innovation, as we continue to push general boundary and introduce unique story telling perspective. The well-received drama Always On the Moon, [Beam of Heart], which was released during the Chinese New Year holiday recorded viewership share of over 27% as it peak, according to Enlightent. It also set a new record for our drama viewership on CCTV-8 and IQIYI popularity index saw was 9,959, just shy of 10,000 landmark. After establishing our industrial leadership in the suspense gyro with life on theatre, we have continued to strive in the comedy gyro introducing three new titles and [Love On Theater] brand this quarter. This includes our Parallel Universes, [indiscernible] and the Great Nobody, [indiscernible] both of which are dramas spin off or spin off our hit variety shop. Additionally, the new release A Soldier’s Story, [indiscernible] has broken IQIYI records for the highest popularity index score, highest revenue and the best ROI for [indiscernible] on filter production. During the quarter, we also released a collection of that world’s high-quality dramas, such as Burning Flames, [indiscernible] Detective Chinatown 2. For the quarter, our movie viewership outperformed competitors as reported by Enlightent, we released 24 major films across genres like crime, suspense and action including top grossing sale article releases on our movie channel. Meanwhile, 32 movies debuted on cloud cinema channel to positive audience reception. We also observed encouraging early responses on new action master season in art film cinema, when IQIYI brand releases. For various shows, we made solid progress in both new releases and established IPs. Become A Farmer deliver to leverage the strong bounce of the first season and are achieved not only a notable boost in popularity and net revenue, but also supported by resurgence in viewership for the first season. In addition, five have a power for season with a high level of interaction among guests. Its underwriting index supports 8,400 peak. For animation, we go better ahead what we do and users responded well original works, The Great Ruler and Against the Gods retention achieved the best performance for domestic animation on our platform. Our upcoming dramas feature send us title such as for Spirit, Matchmaker, Follow Your Heart, [Yan Xingqi and as Husband]. And Observes recent releases, including an onset of recent related including In the Name of Brother [indiscernible] and others have bolstered our reputation for delivering high-quality diverse content with great audience appeal. Notably, CTO become the highest rated show during prime time on CCTV1 this year. In particular To the Wonder what other type exemplify our success in branding, artistic merit with commercial success. The third adapted from literacy prose and spare art with light comedy -- with live comedy elements support on pioneer's active standard and offer cinematic experience that sets a new industrial benchmark. Additionally, this service is the first to utilize our income development cloud test onset production management system enabling instant collaboration on daily shorting footage remotely and largely boosting production efficiency. [Todovander] has achieved a profitability, the other domestic and international acclaim. As a top start ratings on [indiscernible] this year becomes the first Eight Episodes miniseries to our daily CCTV1 prime time slot and was the first Chinese drama to be selected for the prestigious, long-form competition at Canneseries. The light on filter is set to introduce six cycle in 2022, with notable ones such as the already released Tell No One and the upcoming Lost English [indiscernible]. In addition, we have broadened our genre focused on Zelter with two new brands, [Michael Colson Zelter Vietnu] which focuses on premium miniseries that explore the nuance of everyday life with To the Wonder being its first title, the Master Peace. On the other hand, offering adoption of its team later works, we believe the shelter mode will further enhance content performance and commercial value. Our Q2 movie offer -- offerings include social relevance, title like [indiscernible] will showcase beyond [indiscernible] from the Chinese New Year release window along with the director, [indiscernible] action package suspect transition time. Additionally, we are eager for the May 17 Shelter release of Harvin Blade based on [indiscernible], We have seen a strong return on our established IP including the Detectives’Adventure Season 4 and The Rap of China 2024. We are also exploring new IPs in in the reality show gyros with I Play Basketball in Hengdian and Wonderland. Our original production capabilities for animation continue to improve. We expect the number of kids animation titles which release next quarter to increase in addition to sequels from existing scenarios. We will launch new IPs such as [Fantastic around Xiaot] we also pressed forward with sequels new animation IPs like Phoenix Gardens, the Golden Coast and the Blade Master in the martial arts and fantasy genres. We reconnect that the core strength stress of the long form video industry like on consistently delivering high-quality content that strikes our balance between creative value and the economics success on each in this industry is secured by combined elite talent and industry resources, rigorous content evaluation and management, sophisticated business intelligence and innovation technology. As we progress through 2024, our approach will focus on crafting top tier that was content that leverage our leadership in drama category we’re exploring advancement in the gyros. We will also refine our release strategy to align with evolving taste of our audience. Moving on to the advertising business. In the first quarter, our revenue reached RMB1.5 billion, up 6% annually, which was driven mainly by the growth of performance ads. Performance ads are the highlight of the quarter, the record high revenue was propelled by the growing adoption of generative AI which in turn improves ROI for advertisers. In fact, we have successfully integrated generative AI tools into our IT advertising platform allow advertisers to promote increased advertising materials on their own. These tools have been effectively reducing production costs, while improving ad quality and boosting ROI. For gaming and the short drama advertisers, ads created with generative AI tools have seen increase in ROI by over 40% -- 50%. With the role of generative AI rapidly expanding, we are leveraging its broader potential to transform the world of advertising. On brand ad business side, our premium content continues to attract brand advertisers. With over half of the revenue stemming from content targeted ads, a great example to this trend is drama always on the move, Narabima which achieved exceptional ad sale performance. Additionally, the variety show Become a Farmer, which debuted in 2023 has seen a notable 88% increase in revenue this year. By industries, the food and beverage sector stood out with solid increases in spending both annually and sequentially. The medical services and the communication sectors also rejected substantial growth in ad revenue exceeding 20% on both annual and sequential business. Looking ahead, we set to see our resurgence in brand ad spending as second quarter as our traditional high season for brand ad business, and we have a strong lineup of [indiscernible], although we remain cautiously optimistic regarding the brand advertisement market for this year. We anticipate domestic brands to show faster recovery than their international peers. Moving on to our technology and products, our dedication to advancing technology innovation remains steadfast, as it plays a crucial role in driving the industrialization of content production, improving user experience and boosting operational efficiency. We look forward to the opportunities that AI presents across our business. We have been resonating the revolutionary impacts that the rest of AI technology is having on the involving entertainment ecosystem other than the performance as discussed earlier. We also see the substantial benefits from integrating generative AI into the program of production and operations. Well, we are still at the initial stage of fully leveraging the potential of generative AI. It has meaningfully enhanced the industrialization of content production, contributing to the content quality improvements and cost saving. For example, we utilized our in-house developed data-driven platform, the IQIYI Content Production Management System to meaningfully improve the heat ratio, while enhancing content production and operational efficiency. Our latest upgrades expanded its scope from dramas to include variety shows, animations and movies. And it is continuously refine to improve production and management capabilities. In addition, we have incorporated our broader range of AI into the system, streamlining everything from content selection to promotion. Our new AI features not only can summarize novel and scripts but they also -- but they can also assist in crafting story outlines and character profiles, increasing producers, raising efficiency by several times. Additionally, our system skillfully handles wise restoration for actors and cost of production, which has been implemented in major projects beyond production on marketing and the distribution efforts are being upgraded as well. We are now better equipped to produce compelling promotional materials under our smart video search function offers more accurate content recommendations by effectively responding to cloud oriented searches and the conversational dramas. The use of products done great price -- pride in our continuous commitment to improving the user experience, the introduction of kids mode on our Smart TV app designed to collect content suitable for children has resulted in increased parental trust and the user engagement time. Last but not least, for our business performance in regions outside of mainland China. We achieved solid annual revenue growth in the first quarter. Membership revenue grew both annually and sequentially with nearly 80% annual increase in markets such as Hong Kong and the UK. We continue to uplift on the inflows of our content and the brand in the overseas markets. IQIYI original continued to gain traction among overseas audience. The overall viewership of Sword and Fairy, fell forth in all regions and categories on our overseas platform, top to popularity charts in Thailand, Vietnam and Indonesia. The second season of our Malaysian original Rampas Cintaku continued its success over the first season boosted both traffic and membership revenue growth on our Malaysian side, leveraging our premium content developed local partnerships to boost global penetration and monetization. We have strengthened a house with telecom companies and tourism authorities in Hong Kong and Thailand and the Lansdowne, IQIYI’s street drama slot on selected local TV station in Thailand. Looking ahead, we aim to provide a steady slate of premium CPOP content to keep overseas market and accelerate the production of original premium content for local audiences. Maybe we will persist in our efforts to promote CPOP and local content through partnership with Southeast Asian TV stations as we have our brand presence in key markets. We are also committed to deploying a variety of IP monetization opportunities. In summary, the strong performance in the first quarter demonstrated the successful execution of our high-quality growth strategy. We recently celebrated our 14 anniversary. As we step all into the future, we are seeing more exciting opportunities ahead, especially when we assess the power of generative AI, which could potentially transform the entire landscape of entertainment. With this in mind, we are committed to leveraging the pioneering technologies to further enhance our ability to continuously provide high-quality content and extend our lead in the industry. Now let me pass on to Jun Wang for our financial performance
Jun Wang: 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 RMB7.9 billion, membership services revenue reached RMB4.8 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 RMB1.5 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. The content and distribution revenue also hit all high reached RMB928 million and grew 27% annually. Moving on to cost and expenses. The accounting cost was RMB4 billion, down 5% annually driven by our improvement in content strategy and operating efficiency. Total operating expenses was RMB1.4 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 RMB1.1 billion and its corresponding margin is 14%, reaching historical high. Furthermore, the operating cash flow totaled RMB938 million, remaining positive for eight 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 RMB7.3 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 Q1 financial data, please refer to our press release on our IR website. With that, I will open the floor for Q&A.
Operator: [Operator Instructions] Your first question comes from Xueqing Zhang in from CICC.
Xueqing Zhang: Congratulations on the strong results. My question is about the membership business. The company did not discuss 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?
Yu Gong: [Foreign Language]
Chang Yu: 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.
Youqiao Duan: [Foreign Language]
Chang Yu: 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.
Youqiao Duan: [Foreign Language]
Chang Yu: 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 it lacks objectivity.
Youqiao Duan: [Foreign Language]
Chang Yu: Since the beginning of 2022, we have always emphasized that the core goal of our membership business is to maximize long-term membership’s 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 three drivers to revenue growth, namely ARM, membership life-time 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.
Youqiao Duan: [Foreign Language]
Chang Yu: 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.
Youqiao Duan: [Foreign Language]
Chang Yu: 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.
Youqiao Duan: [Foreign Language]
Chang Yu: 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.
Operator: Your next question comes from Maggie Ye from CLSA.
MaggieYe: [Foreign Language] My question is related to our recently released IQIYI original premium miniseries 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?
Chang Yu: We'll invite our CCO, Chief Content Officer, Mr. Xiaohui Wang to answer this question.
Xiaohui Wang: [Foreign Language]
Chang Yu: 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 Douben 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.
Xiaohui Wang: [Foreign Language]
Chang Yu: In terms of content and innovation, we adapted the story from a little release pros and spiked up with light comedy elements. Actually, this brings new energy and rhythm to the drama with -- for a relatively strong literary quality.
Xiaohui Wang: [Foreign Language]
Chang Yu: 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.
Xiaohui Wang: [Foreign Language]
Chang Yu: 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 competitive advantage in the drama sector while seeking more breakthroughs in other content dramas.
Xiaohui Wang: [Foreign Language]
Chang Yu: Regarding our drama strategy, we will continue to consolidate our advantages in the realistic genre 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.
Yu Gong: [Foreign Language]
Chang Yu: Our CEO, Mr. Gong just added, actually, content strategies, cost control is very, very important and just namely To the Wonder that actually had a very good cost control. So that's why commercial aspect it performed very well in this.
Operator: Your next question comes from Thomas Chong from Jefferies.
Thomas Chong: [Foreign Language] 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 generative AI and our advertising business?
Chang Yu: We will invite our CTO, Wenfeng to answer this question related to performance ad.
Wenfeng Liu: [Foreign Language]
Chang Yu: Performance ad has indeed achieved considerable growth in the first quarter. Actually, in the first quarter, the ad revenue reached an all-line pipe 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 in 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 aspects.
Wenfeng Liu: [Foreign Language]
Chang Yu: Jun Wang actually mentioned the three aspects. First, in terms of ad material production efficiency, advertisers can use this AI tool 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 ad material production, generative AI helps industries to create high-quality materials that coincide with high-quality video content on our platform, making ad 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 placements more precise and personalized helping advertisers achieve better results, while enhancing the monetization efficiency of user traffic.
Jun Wang: [Foreign Language]
Chang Yu: Moving forward, we will continue to leverage generated AI capabilities to help advertisers to track high-quality users, achieved on top running 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.
Jun Wang: [Foreign Language]
Chang Yu: We will invite Mr. WU Gong Lu who is the Senior Vice President of Brand ad business to add on the performance for the runout.
WU Gang Lu: [Foreign Language]
Chang Yu: 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.
WU Gang Lu: [Foreign Language]
Chang Yu: 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.
Operator: Your next question comes from Lincoln Kong from Goldman Sachs (NYSE:GS).
Lincoln Kong: [Foreign Language]
Chang Yu: So my question is pretty straightforward to ask about our future strategy, especially what are the areas the management is focusing on for and there for a longer term?
Yu Gong: [Foreign Language]
Chang Yu: 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.
Yu Gong: [Foreign Language]
Chang Yu: 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.
Yu Gong: [Foreign Language]
Chang Yu: And second, for generative AI, we will apply more broadly and more deeply and into contemplation and operations to increase our efficiency.
Yu Gong: [Foreign Language]
Chang Yu: Third is to utilize all means to fight piracy.
Yu Gong: [Foreign Language]
Chang Yu: 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.
Yu Gong: [Foreign Language]
Chang Yu: 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.
Yu Gong: [Foreign Language]
Chang Yu: And in the future, we will also both better serve to demographics. For example, the elderly and the children by adopting products designed 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 safe and reliable content.
Operator: There are no further questions at this time. I'll now hand back to management for closing remarks.
Chang Yu: 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.
Yu Gong: Thank you. Bye-bye.
Operator: Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.