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Chinese Streamer iQIYI Squeezed by Changing Content Context

Chinese video streaming giant iQIYI saw its losses deepen, in the April to June second quarter of its financial year. The company grew subscriptions, but was hit by rising content costs and lower advertising revenue

Its parent company, Chinese search leader, Baidu saw its year on year profits drop, though it recovered from loss in the first quarter. Both companies are listed on the U.S.-based NASDAQ stock market.

Revenues at iQIYI grew to RMB7.1 billion ($1.01 billion), an increase of 15% that exceeded financial analysts’ consensus estimates of 7%. The company confirmed that subscriptions narrowly topped 100 million at the end of June.

But iQIYI’s operating losses grew to $272 million (RMB1.9 billion in the quarter, with the loss margin worsening from 22% to 26% reflecting increased spending on content. Net losses increased to $339 million (RMB2.3 billion) up from RMB2.1 billion in the same quarter last year.

The company described the result as “another solid quarter of performance” and said that its strategy remains unchanged. “With the fast development of China’s entertainment industry and the approaching 5G commercialization, we are confident in our growth prospects and look forward to capturing the enormous opportunities ahead,” said Gong Yu, iQIYI founder and CEO.

The company acknowledged “some recent challenges facing our industry” without elaborating on regulatory changes that made production more onerous, and the slowing rate of China’s economic growth.

iQIYI itself paid $732 million for content in the quarter, an increase of 7%. But its sales of content to third parties dropped by 4%, due to delayed content deliveries

On a conference call with analysts, Gong said that iQIYI had generally benefited from the film and TV production slowdown that began in the second half of 2018. “We have regained bargaining power and are more in control of our content costs,” he said, referring specifically to a reduction of talent costs, following the Fan Bingbing tax scandal. He said that where talent costs might previously have accounted for RMB 80-120 million per show, that has now fallen back to RMB40-50 million. CFO Wang Xiaodong said that content costs were likely to remain within the guidance that the company has previously provided, albeit at the upper end.

Advertising revenues dropped by 16% “mainly due to the challenging macroeconomic environment in China, the delay of certain content launches and slower-than-expected recovery of (its) in-feed advertising.”

Baidu, which has lost some of its tech sector dominance, made operating profits of RMB233 million ($33 million) in the April to June period. In the equivalent period last year it made operating profit RMB5.42 billion. In the January to March period it lost RMB936. Baidu’s quarterly revenue grew to RMB26.3 billion ($3.84 billion), a 1% increase on last year.

Indicative prices after normal stock trading hours showed iQIYI ADR shares slumping by 9% to $16.40, compared with a Tuesday official close of $18.08. Baidu ARD shares moved in the opposite direction, rising from $104.22 at close to $113 in after hours trading.

 

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