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IQIYI Inc  (NASDAQ:IQ)
Q3 2018 Earnings Conference Call
Oct. 30, 2018, 8:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the IQIYI's Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advice you that this conference is being recorded today, Wednesday the 31st of October 2018.

I will now like to hand the conference over to your first speaker today Ms. Dahlia Wei, Investor Relations Director for IQIYI. Thank you. Please go ahead.

Dahlia Wei -- Investor Relations Director

Thank you, operator. Hello, everyone and thank you all for joining IQIYI's third quarter 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 Chief Executive Officer; and Mr. Xiaodong Wang, our Chief Financial Officer. Mr. Gong -- after 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 will hold a Q&A session.

Before we proceed, please note that 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.

Yu Gong -- Founder, Chief Executive Officer and Director

Hello, everyone and then thank you for joining us for the third quarter earning calls. We continued to deliver solid results during the third quarter. Total revenue were RMB6.9 billion, up 48% year-over-year. The performance was primarily driven by robust growth in the number of subscribers, which reached RMB80.7 million at the end of September, representing a record high of quality net addition of RMB13.5 million.

This quarter we also observed further enhanced user reach in engagement level and the time spend as summer time is the peak season for us during the year. We addressed number one across -- a number of operating metrics among our peers, according to independent data tracking by major research firms. This again reaffirms our industry leading position and competitive stress.

We will start this quarter's business review with Membership services, which has become our biggest revenue contributor. Membership revenue was RMB2.9 billion, representing 78% year-over-year growth. Premium content continues to be the most important driver for membership growth. We released the most popular drama of this year in China, Story of Yanxi Palace during the quarter. The megahit costume drama that we originally produced has had several records in the entertainment industry in China.

It harvested over 20 billion total video views and has become the single most successful title in terms of subscriber conversions in our history. Along with a variety of other premium content, it greatly boosted our subscriber numbers. Our joint membership program with JD.com continue to progress nicely in the third quarter, attracting a steady inflow of annual subscribers, who wish to enjoy benefits from both companies. In additions with JD.com, we continue to pursue opportunities to develop other across industrial partnerships, including telecom areas and commercial packs.

During the third quarter, we established a new cooperation with a number of respected online service providers to further broaden our subscriber base. This partnership not only help us reach different geographic and demographic user groups, but also help us to enhance the benefits and privileges for our member -- for our VIP members, all of which collectively contributes to membership growth.

Next advertising business. On the last conference call, we mentioned that we are conscious about advertising for the second half of this year. Advertising revenue in the third quarter came in at RMB2.4 billion, largely in line with our expectations. Our advertising business went through some difficulties this year, mainly due to the following factors. First, the impact of the FIFA World Cup, which diverted advertising package to traditional TV. Second, recent regulatory headwinds, as a result of which weakening up some in feed advertisements from certain high risk profile sectors. In addition, certain regulation has particularly impacted some of our online gaming clients who used to spend heavily in advertising.

As part of this near -- as part of this near-term headwind, we remain committed to advertising business which is an important component of our business model. We're trying to expand, diversify and optimize our client pool in an effort to be resilient to potential challenges and deliver sustainable growth. Apart from our membership and advertising business, we're pleased to see our other business continue to scale as our Netflix plus model gradually bears more fruit. Content distribution lead to a drop, gaming IP licencing as well as talent agents in business, all recorded considerable year-over-year growth. The strong performance of this business was again driven by our premium content.

Now let me go over some developments on the content side. As we mentioned before, IQIYI's focus is on producing and selecting the highest quality content. Our third quarter results reflect this strategy, as we continue to devote resources toward self-producing content based on quality and originality and innovation. Nothing exemplifies this better than the ground-breaking success we have seen with Story of Yanxi Palace this quarter, which is one of the most iconic drama series in China and brought all historical viewing webcast for dramas. Story of Yanxi Palace has now been distributed to over 17 countries globally and has created wide spread mania.

The remarkable success of the show validates our focus on producing and selecting the highest quality content.

Turning to variety show, Season 2 of the Rap of China, our flagship original music reality show attributed in late July with huge success. The show reignited the craze for rich culture across China, especially among younger generation. And together with our self-produced Idol Hits and Season 5 of Qipa Talk as well as exclusively essenced as the Voice of China. So, a much delivery of variety shows during the quarter achieved excellent results in terms of audience ratings and monetization.

For the rest of the year, we have a strong pipeline of high quality premium content, including self-produced dramas. For animation and comics, in early September iQIYI's first original 3D animation title, Beyond the Ocean received the best art award as the first and inspired domestic original animation festival held in Shanghai. We began developing original animations titles in 2014 and have since launched six successful animated serials.

First of all, we formed our joint venture with Super Sports Media, a leading service -- a leading service provider in China for sports marketing, sports culture, communications and copyright distribution. The new joint venture we operate all sports related content business including the upgraded iQIYI's sports app, which brings together an extensive offering of sports content with smoother user experience. Under this JV structure, we aim to attract more resources and investment for iQIYI Sports, which remains raising and penetrating from our eco-system.

For online literature, I want to highlight that our IQIYI literature app recorded significant growth in user engagement and traffic during this quarter, driven by primarily by readers converted from video orders of the Story of Yanxi Palace. Our project Yunteng continues to make remarkable progress in establishing our operation with numerous production companies to adapt literature IP into video content.

Finally, let me quickly review some progress on technology front. We also -- we're always dedicated to applying the cutting edge technology in our video business especially in areas that help us better understand our user, better produce our content and better serve our partners. For example, AI based intelligent editing was applied to our variety show, including The Rap of China, production of the show involves dozens of cameras shooting from different angles at the same time. We utilize AI to rapidly sort, zoom and select the best of shots taken, which is as process as buffering during each second. This allowed us to significantly reduce our time and work load for post production.

An update on our DRM, Digital Right Management System. After our software development, the DRM technology was certified by ChinaDRM Lab in April, recently iQIYI also adopted Google's Widevine DRM technology program browser, which allows us to copyright protected Hollywood content on our browser based platform. Our R&D team also optimized video loading and playback reflections for this content to ensure clear and a smoother video playing. We're trying to process with Beijing Gehua Cable TV Network and Baidu to launch a AI integrated setup box, Gehua Little Fruit.

The partnership leverages Gehua's MVPD content service as massive user base and the nature of dealing season, as well as iQIYI's vast library of streaming video content and online video technology, also the box devices is embedded with Baidu's DuerOS operating system and AI based voice recognition technology to improve those ability and our menus. This historic partnership makes the first attempt that traditional cable TV networking China has partnered with an Internet video streaming company and will help further expand iQIYI's coverage on TV front.

Lastly, I'd like to provide a quick update on our VR products. Sales volume of iQIYI's VR tool headset product has ranked number one in the RMB2,000 plus mid-to-high end VR all in one headset category on both JD.com and the Tmall platforms. The iQIYI tool has also recognized with 2018 METIS Award for the VR and AR innovation. The METIS Award is organized by the Ministry of Industry and Information Technology. The China Academy of Information and Communications Technology and the Mobile Intelligent Terminal technology innovation and industry allies, widely known as AM turning (ph) award. This represents one of the the highest honor in the field.

In conclusion, I am pleased with our performance during the quarter. Our major operating metrics and subscriber numbers all reached historical new height. And our content eco-system has never been stronger with such a wide range of engaging and a popular entertainment. As we continue to generate more revenues from diversifying the business, our business model is starting to pay-off. We are also developing new cross industry partnerships and expanding to a new distribution terminals, so that we can further elaborate our plan for advantage and our IP value. I have strong confidence in our strategy and business model to generate long-term growth and the value for our shareholders.

Now, I'll pass the call to Xiaodong.

Xiaodong Wang -- Chief Financial Officer

Good morning, everyone. Let me go through our financial highlights, starting on January 1st, 2018, iQIYI adopts ASC 606, a new revenue accounting standard that nets mainly from the revenue and the cost of revenue line items to increase the comparable review with Q3 2018 number, 2017 number -- 2017 revenue numbers for today's discussion has been adjusted net of '18.

For the third quarter of 2018, iQIYI total revenues were RMB6.9 billion, up 48% year-over-year. The increase were primarily driven by a strong growth of our membership service. Membership service revenue was RMB2.9 billion, up 78% year-over-year. The strong growth was driven by robust growth of number of subscribers which reached 80.7 million with record net addition 13.5 million during the quarter. Online advertising service revenue was RMB2.4 billion, down 4% year-over-year as Dr. Gong just mentioned, the decrease in advertising was primarily due to the the FIFA World Cup impact as well net regulatory headwinds.

Content distribution revenue was RMB834.6 million, up 200% year-over-over primarily due to a number of premium content titles that were distributed during the quarter. Other revenue weres RMB831.1 million, up 157% year-over-year. Other revenue was generated from live broadcasting, online game, online literature, IP licensing and talent agency etc. The growth in other revenue reflects a strong performance across our various vertical business lines as we continue to pursue a diversified business model that fully leverages the content value and the massive user traffic on our platform in particular, we started consolidating Skymoons into our financial since the deal was closed in mid-July.

Moving onto the cost of revenue, our cost of revenue were RMB7.7 billion, up 66% year-over-year, after deducting the value added tax in the same period of in the year '17, the increases were primarily driven by the growth of content cost as we continue to invest in more self-produced content and licensed copyrights strengthening our content ecosystem. Content costs as a component of cost of revenues were RMB6 billion, up 66% year-over-year.

Turning to operating expenses, SG&A expenses in the third quarter were RMB1.3 billion, up 66% year-over-year, primarily due to the increased marketing spends related to iQIYI's mobile apps content related promotion and the branding expenses, as well the higher share based compensation expenses arising from the acquisition of Skymoons. Our R&D expenses were RMB558.4 million, up 63% year-over-year primarily due to the growth of personnel-related compensation expenses. Operating loss in the third quarter was RMB2.6 billion, compared with operating loss of RMB1.1 billion in the same period of year '17. Our operating loss margin was 37%, compared with an operating loss margin of 23% in the same period last year. Total other expense were RMB539.4 million compared with total other income of RMB15.6 million during the same quarter of year 2017.

In the third quarter of year 2018, we recognized RMB593.1 million of foreign exchange loss due to the depreciation of RMB against the US dollar. Loss before income tax were RMB3.1 billion compared with RMB1.1 billion during the same period of year 2017. Income tax benefit was RMB6.1 million compared with an income tax expenses of RMB0.8 million during the same period of year 2017. Net loss attributable to iQIYI was RMB3.1 billion compared with RMB1.1 billion during the same period of year 2017. Diluted net loss attributable to iQIYI per ADS were RMB4.34 for the third quarter of the year 2018. As of September 30, 2018, the company had cash, cash equivalents and short-term investments of RMB9.7 billion.

Turning to the fourth quarter guidance, we expect the total revenue to be between RMB6.48 billion to RMB6.75 billion, representing an increase of 43% to 49% year-over-year. The forecast reflects iQIYI's current and preliminary view, which is subject to change.

That concludes our prepared remarks. I will now turn the call to the operator and we'll move into the Q&A.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. (Operator Instructions) Your first question today comes from the line of Ella Ji from China Renaissance. Please ask your question.

Diying Ji -- China Renaissance Securities -- Analyst

Good morning, management. Thank you for taking my question. My question is about your online ad revenue line. So first of all, can you give us some outlook expectation for the fourth quarter? Do you expect this World Cup and the regulatory impact will continue in 4Q? And sequentially, how does 4Q ad revenue looking comparing to 3Q? And then I also wonder if you can also provide more colors into the line, so for example, between KA and SME advertisers, could you share more colors which are getting more hit and what categories, and what's your exposure to these categories as a percentage of the revenue? Thank you.

Xiaodong Wang -- Chief Financial Officer

Ella, this is Xiaodong. I don't think you've got -- you only read one press release. You read up hundreds of press release. Let me just try to make it simple. Okay, I understand your question. So, basically what I can tell you, we don't disclose the detail of like the revenue guidance, but what I can tell you is definitely the year-over-year decrease is normal. So you expect a positive increase next quarter, but as we addressed before, a lot of different facts that we should have different impact on our revenue in advertising business.

So I think you will have a normal increase in your first quarter. And -- but you mix a lot of facts together. What I'm trying to tell you is just now is from an year-over-year perspective, we expect some positive increase, but as we discussed before, the third quarter is a peak year of -- has been a strong for the whole year. So there will be something there that has impact on revenue in the first quarter.

And the second part of your question is between like KA and SME, definitely, the FIFA World Cup we have like more impact on the KA account as well as brand-new advertisers. By the way, we do have some, let's say where you try to make our revenue of SME more healthy. So -- but this is something in -- during the third quarter, so there we will have some impact on the revenue of SME. But we expect those will come back in the next few quarters. So, definitely, I think we still have confidence that ads revenue will be back to normal in the next few quarters.

Operator

Thank you.

Yu Gong -- Founder, Chief Executive Officer and Director

(Foreign Language)

Dahlia Wei -- Investor Relations Director

Dr. Gong just added that for the -- our SME side, some categories that was hit by the regulator is that, why is the game industry because as you all know, there would be -- there are fewer games launched this year. So accordingly, there will be fewer advertising budget spent on the -- from the gaming sector. And also in the third quarter, we also cleaned up some not so healthy advertisements on the in-feed side. So that also had some impact on our SME clients.

Operator

Your next question today comes from the line of Thomas Chong from Credit Suisse. Please ask your question.

Yiu Hung Chong -- Credit Suisse AG -- Analyst

Hi, good morning. Thanks management for taking my questions. On the membership revenue, how should we think about the subscribers trend as we go into Q4? Should we expect there would be a normal seasonality there and how should we think about the outlook in 2019? And my second question is about content cost. As we head probably toward the end of the year, how should we think about the growth momentum for content cost as we go into 2019? Thank you.

Yu Gong -- Founder, Chief Executive Officer and Director

(Foreign Language)

Dahlia Wei -- Investor Relations Director

For the subscriber, because Q3 is the highest seasonality during the year, so we recorded a net addition of 13.5 million. In Q4, we expect that we will continue to grow but may not be as strong or as big as 13.5 million that we saw in Q3. That will definitely continue to grow. For the whole year 2019, we also have very positive view and we expect the net addition for full-year 2019 will be no less than the full-year addition in year '18.

Yu Gong -- Founder, Chief Executive Officer and Director

(Foreign Language)

Dahlia Wei -- Investor Relations Director

Since this summer, we already uploaded the procurement price for TV series that we purchased from the TV drama series and that price already started to decrease, but as you know, there will be a time lag of the purchase to broadcast our platform, nearly six months of time lag. So the impact of content costs will only hit in next year, 2019 and the impact will be limited. But in the long run, we believe procurement price for licensed content will be a downward trend.

Operator

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

Eddie Leung -- BofA Merrill Lynch -- Analyst

Good morning. Thank you for taking my questions. Just one quick follow-up on content costs, probably more about your cash outflow. We have seen quite a bit of cash outflows in the past two quarters, I suppose those would be related to content cost. Just wondering, is there any seasonality and how should we think about the cash outflow in the upcoming couple of quarters? Thanks.

Xiaodong Wang -- Chief Financial Officer

This is Xiaodong, actually, I think those were pretty good questions. We don't see any seasonality for the cash flow, because actually it's more related to the content cost investment that we made in the -- let's say, quarter before, two quarters before. I think that is actually depending on the extra cash status of the company. So basically, what I can tell you is, as the membership service continue to grow, the mix impact between membership and ads revenue will help us on the cash inflow. And -- but with more investment on the self-produced content, you would expect like see the worst situation on the cash outflow. So net-net, I will say it will impact almost the similar cash burn rate in the next few quarters.

Operator

Your next question today comes from the line of Piyush Mubayi from Goldman Sachs. Please ask your question.

Piyush Mubayi -- Goldman Sachs Group Inc. -- Analyst

Thank you, Dr. Yu. Thank you, Xiaodong. I've got two related questions and when I look at your subscriber revenues, they've done exceptionally well and your customers have been -- you've been able to retain the customers that you're adding, which leads me to believe, how do you think is the ratio of your paying customers and to either DAU or MAU and if you could remind us how DAU/MAU have been progressing while the customer numbers have been growing rapidly? And related to that is, if you could just revisit your pricing, how you think about pricing for the next two, three years because it appears the subscription business is doing a lot better than initially thought. And also your success with Yanxi Palace is so powerful, that would give you the ability to price up, assuming you've got more shows like that coming through. And second, if you could just take us through the economics of the one successful show, we'd love to hear the details. Thank you.

Xiaodong Wang -- Chief Financial Officer

Hi, Piyush, good morning. I think I can do the first question and actually, as we discussed before several months ago, I think we expect that we will consider the price change once we see the status growth of the -- steady growth of the membership service. And now I think, in fact this probably seems to be much bigger than we expected with still the very fast growth. So -- and again, we still think that the strategy it appears to be still correct. So -- let's say, we'll still be very cautious in the price change in the next few quarters, at least. And here, we see the slowdown trend of the membership growth. And we don't think it's done yet. As probably we will see something else to increase our ARPU of our memberships business.

For example, we will continue to extend the paying period of our subscribers throughout the year. I think, I'd tell you something about like say, around six months and now I think we see like the very good trend to increase the paying period, to like additional two months or three months. So I think that's basically the strategy we're going to carry in the next few quarters at least. I think I will let Dr. Gong to comment on the second one.

Yu Gong -- Founder, Chief Executive Officer and Director

(Foreign Language)

Dahlia Wei -- Investor Relations Director

For a show, we internally look at two metrics to measure the success of a drama or a show. One is the time, the time -- viewing time of the show consumed by our users versus the total time spent in that specific timeframe. And secondly, we also look at the first actual payment that we collected from our -- the users who become a -- converted to a user -- to a subscriber on these dramas. Although those two metrics might not be exactly perfect to measure the subscription revenue, we think altogether, this will help us to gauge a rough amount of how the subscription revenue perform for this drama.

Operator

Your next question today comes from the line of Alicia Yap from Citi. Please ask your question.

Alicia Yap -- Citigroup Inc -- Analyst

Hi, good morning, Yu Gong, Xiaodong, and Dahlia. Thanks for taking my questions. I have a follow-up question on the advertising revenue. One or two, if management can clarify what are the not so healthy categories that you have cleaned up during the quarter and are these revenue gone and not recovered in the future? And then other than specific sector impact, have you seen any impact from the macro softness that is affecting the advertising budget sentiments especially into your 4Q guidance as well as into the 2019? Just quickly on housekeeping, if you could share revenues and the total expense as related to the Skymoons consolidation would be helpful. Thank you.

Xiaodong Wang -- Chief Financial Officer

Okay. You've got a lot of questions. The first one, I think those -- so we're calling not-so-OK I see, segment is actually -- we have some customers which do not have the accelerated license needed to put their ads on the Internet. So we don't know whether they are like say a good customer and a bad customer. But from our perspective, because they don't have like I said, related documents to prove they are qualified advertisers so we just let them go. I think that's a major reason why we see something like a decline on our customers numbers in this sort of quarter in our SME business.

And everybody is talking about like the macro impact on ad spend, it's definitely, I think we will see some impact. We don't know how long and how soon it will be, but what I can tell you as we said before, it's kind of like a spread we put on the normal business. We still have the confidence, we can do better than the other competitors or players in the market. So you can still expect -- as I told Ella just now, you will still see some positive increase in the next few quarters on our entire ad business. And the third question for the detail on Skymoons, because it's not material. So, we don't disclose the details, but you can just imagine because it's not material, so it does not like -- impact on our total revenue.

Yu Gong -- Founder, Chief Executive Officer and Director

(Foreign Language)

Dahlia Wei -- Investor Relations Director

Dr. Yu just mentioned one more category that might be impact from the cleanup was some advertisement related to the merchants related category and also 2019 we expect kind of having revenue, we'll continue to grow, but the growth rate might be somewhat decelerated from the previous year's high growth rate.

Operator

Your next question today comes from the line of Karen Chan from Jefferies. Please ask your question.

Karen Chan -- Jefferies LLC -- Analyst

Thank you management for taking my question. Just a bit follow-up on the advertising revenue, just wondering how much of that third quarter decline is attributable to one-off World Cup and also your practice cleanup of SME ad customers. In other words, should we be seeing that quarter as kind of a trough and a sequential recovery in the following quarters. Also a quick follow-up on the content cost, how should we think about content cost going into rest of the year and 2019 taking into consideration our content pipeline. And from a longer-term perspective, the pay-cap control on celebrities on both the drama and variety show front. Thank you very much.

Xiaodong Wang -- Chief Financial Officer

So, OK. The first I cannot give you exact number of the integral paperwork because it's more like say project impact our major advertisers. We expected the revenue -- ad revenue to be like see increase during the third quarter, but actually we see a decreased trend. And so as I just said is evident of normal. So we do have like say very high confidence where we see like see healthy growth in the quarter, but as I just said, you're going to see this -- third quarter actually typically is a strong quarter throughout the year and the fourth quarter definitely is weak quarter of the quarter.

So I don't think you will see like sequential growth like strong growth in the fourth quarter, but from year-over-year perspective definitely we'll see some growth and a very healthy growth of the ad business. And I think let's say, OK. For the content cost and for the rest of years and then you know the content cost actually and we amortize the content cost throughout the year a little bit longer.

So what I can tell you is and you wouldn't see any decrease in absolute dollar amount of online cost in the reminder of the year because maybe the titles we launched in the first quarter is about the same -- so the quarter, but still there will be some remaining impact of the content (inaudible) in the first quarter. So I would expect you will see some slightly increase, but not maybe not that big in the first quarter.

Operator

Your next question comes from the line of Xueru Zhang from 86Research. Please ask your question.

Xueru Zhang -- 86Research Limited -- Analyst

Good morning management. Thanks for taking my question. I have question regarding to the Dolphin project headwinds that you have, as we know the format of the drama in this project its very similar to the TV series in US, which will be divided in to seasons. I wonder will this become the mainstream in your original content portfolio? And what is the early feedback from users and what is the implication on content cost going forward. Thanks.

Yu Gong -- Founder, Chief Executive Officer and Director

(Foreign Language)

Dahlia Wei -- Investor Relations Director

The traditional TV drama series have a long in terms of episodes its many, many episodes, very long. It's mostly for the advertising monetization model. For project Dolphin, we follow the North American drama pattern which is more high quality and also shorter length in terms of episodes, for example the CD of a payout is a drama we produced from the Dolphin project. This is very short in terms of episodes and also very high quality and more faithful for the fee-based monetization model, which means we can attract more subscribers for that show.

Operator

(Operator Instructions) Your next question comes from the line of Wendy Huang from Macquarie. Please ask your question.

Wendy Huang -- Macquarie Research -- Analyst

Thank you. Can you provide your top advertising industry categories and also what are the new categories you mentioned earlier that you are planning to add. And also on the -- given the revenue and also the content cost trend you mentioned, so should we expect the Q4's loss margin at a growth level to why didn't narrow. Lastly on the content distribution revenue that has a very tremendous growth this quarter. What's the detailed reason behind that and how should we expect going forward. Thank you.

Xiaodong Wang -- Chief Financial Officer

Okay. I will let Gong to comment on the first part of the question and we didn't provide guidance on margins and but I already gave you some colors on the revenue and the major part of the cost -- the content cost. So I think you can have some rough idea of margin picture in the fourth quarter. And I would like let Gong Yu comment on the first part of the question.

Yu Gong -- Founder, Chief Executive Officer and Director

(Foreign Language)

Dahlia Wei -- Investor Relations Director

On the advertising side, we saw some softness from the FMCG side, but we are actively looking for new clients for the advertising, for example we saw the Internet services, that is a very interesting sector and growing very fast. Although it already enjoyed several years of growth already but we continue to see more innovative is this model than the new emerging companies coming into this sector, so that will be a new sector that add to our -- to our client pool.

Operator

(Operator Instructions) Your next question comes from the line of Binnie Wong from HSBC. Please ask your question.

Binnie Wong -- HSBC -- Analyst

Hi, management. Thank you for taking my questions today. So I was wondering that like for IQIYI certainly a big success, right? And then how should we think about in terms of the subscriber number in terms of their retention ratios staying on the platform. And then, can you just reiterate in terms of our strategy in terms of thinking about like selecting this good high quality content generating of course very high investment for us, but then also high return for us in terms of the strong effort the advertising despite external factors affecting us. How should we think about in terms of the -- into the fourth quarter, any other like promotions or any other things that we should think about when we think about like the growth in subscriber number, that would be very helpful, thank you.

Yu Gong -- Founder, Chief Executive Officer and Director

I think and that is -- let's say and for the last part of your question, I don't think we will have say additional promotion or legacy. We are in neutral promotion, you will see our offer actually is quite steady. And also US is similar trend when we look at like the single effect of single content like Yanxi Palace. We don't see any deterioration on the churn rate, but definitely you are right, well two of the subscriber has come for the content only and but we don't see any like see deterioration on internal rate this year. We believe our platform has become like, say, quite healthy attracting the new subscribers.

(Foreign Language)

Dahlia Wei -- Investor Relations Director

Dr. Gong just added three comments for your -- for the question. First, the most important driver for the quick ramp up of our subscriber numbers to premium content, we added more than 13 million net additions of subscribers in this quarter, mostly driven by the paid content we launched. And we do see some users -- some subscribers stop subscribing after our hit show Yanxi Palace come to an end in August. So the number we announced is as of end of September, it's not our peak number in August. Still, as I said, it's really the important -- very important driver comes from premium content.

And secondly, we also have multiple cooperation with a lot of industry partners, for example, telecom operators, cable TV partners as well as JD.com and so on and so forth. Those are also very important to expand our user coverage and reach. Certainly, it's not so important, but still, we do occasionally launch some holiday-related promotions to attract new users. Even that's not so important as the first two factors, but still contributed to the growth.

Yu Gong -- Founder, Chief Executive Officer and Director

(Foreign Language)

Dahlia Wei -- Investor Relations Director

Okay. With the Chinese Internet users become more sophisticated and the involvement of Internet business coming into the stage, we observed that the people are more willing to pay for intangible like knowledge or entertainment like video content. So that's more than we previously thought. So this next year, 2019 will be -- I think will be better than this year.

Operator

Your next question today comes from the line of Yanyan Xiao from Citic. Please ask your question.

Yanyan Xiao -- Citic Securities Co. -- Analyst

Thank you, management. My question is about the -- your PGC content specifically for the mobile device, also the vertical video or (Foreign Language) you will may be publish in the November. So how do you think this kind of content will differentiate from the former PGC content and you think, can you give us more color about these kind of specific kind of content? Thank you.

Yu Gong -- Founder, Chief Executive Officer and Director

(Foreign Language)

Dahlia Wei -- Investor Relations Director

PGC content has been a very important component of our platform. In terms of video view, the percentage of PGC increased from 40% at the beginning of the year to almost 40% -- 60% by now. So it's very important. And vertical format of content is also a trend that we observed appealed to our users. So we launched some PGC in vertical content. A PGC relatively is lower quality and shorter in terms of length. But in Q4, we are trying to do some innovation and try to -- trying to the development of format into our PPC more professionally produced higher quality content. So in Q4, we will launch some vertical content to see -- to do some experiment to see how that apply to our subscription business and also our advertising business.

Operator

Your next question today comes from the line of Natalie Wu from CICC. Please ask your question.

Hi, good morning. Thanks for taking my question. I've got a simple one. Just given your current cash position in last run rate, just wondering any plan for financing or controlling content cost in the future? Thank you.

Xiaodong Wang -- Chief Financial Officer

Xiaodong here. I think we proved from last quarters, we feel OK right now and -- but I said last time, we will consider all kinds of different alternatives for the future financing, but not necessarily -- probably not necessarily equity with other solutions, probably I don't know convertible bonds straight at it or the bank facility, whatever, but definitely, we'll consider other one's potential.

Dahlia Wei -- Investor Relations Director

Well, I think we -- operator, we can -- I think it's time probably to conclude the call.

Operator

Thank you. Ladies and gentlemen, that does conclude the conference for today. We thank you all for your participation. You may now disconnect.

Duration: 57 minutes

Call participants:

Dahlia Wei -- Investor Relations Director

Yu Gong -- Founder, Chief Executive Officer and Director

Xiaodong Wang -- Chief Financial Officer

Diying Ji -- China Renaissance Securities -- Analyst

Yiu Hung Chong -- Credit Suisse AG -- Analyst

Eddie Leung -- BofA Merrill Lynch -- Analyst

Piyush Mubayi -- Goldman Sachs Group Inc. -- Analyst

Alicia Yap -- Citigroup Inc -- Analyst

Karen Chan -- Jefferies LLC -- Analyst

Xueru Zhang -- 86Research Limited -- Analyst

Wendy Huang -- Macquarie Research -- Analyst

Binnie Wong -- HSBC -- Analyst

Yanyan Xiao -- Citic Securities Co. -- Analyst

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