On March 29, Chinese online entertainment company iQiyi (NASDAQ:IQ) completed its initial public offering. Spun off from Chinese juggernaut Baidu (NASDAQ:BIDU), iQiyi raised approximately $2.25 billion in its IPO.

iQiyi reported its first quarterly results as a publicly traded company last week, reporting heavy losses as it builds out its digital-streaming website and stocks it with popular (yet expensive) Chinese TV shows and movies. But just as Netflix has shown us stateside, charging monthly subscriptions for unlimited access to content can be an extremely lucrative and profitable long-term business model.

Let's take a closer look at the results. 

Tiny models of movie theater chairs placed on a laptop's keyboard.

Image source: Getty Images.

iQiyi Results: The raw numbers

Metric

Q1 2018

Q1 2017*

Year-Over-Year Change

Revenue

$778 million

$495 million

57%

Operating income

($169 million)

($154 million)

N/A

Adjusted EPS

($0.31)

($0.85)

N/A

Data source: iQiyi. Q1 2017 results are estimated in USD using equivalent RMB/USD exchange rates as Q1 2018.

What happened with iQiyi this quarter?

iQiyi's business is split equally between subscriptions and advertising. Paying subscribers get access to more exclusive, premium content. Non-paying monthly active users get to watch free content on the site or in the app, but it's supported by advertising. 

  • Membership services revenue increased 67% year-over-year to $334 million (RMB 2.1 billion). This division represents iQiyi's paying subscribers, who now number more than 50 million. The subscriber count has quintuped in the past two years, which is a great sign that the company is investing in premium content that people are actually willing to pay to see.

  • Online advertising services revenue was up 52% to $336 million (RMB 2.1 billion). iQiyi's AI algorithms (which were developed and provided by Baidu) are becoming fine-tuned, which is attracting plenty of web browsers. The site now boasts 420 million monthly active users, and iQiyi is expanding its library of self-produced content to keep people coming back.

  • Content distribution revenue increased 44% to $42 million (RMB 266 million). iQiyi sub-licenses much of its content to others, who pay royalties for the rights to air it elsewhere.

  • Content costs were up 54% to $617 million. By far the largest component of the $773 million cost of revenue, this hefty bill is expected to continue through 2018.

  • Selling, general and administrative costs rose 42% to $112 million (RMB 704 million). Most of iQiyi's traffic comes from mobile devices, and it pays to be pre-installed on new devices. This division also includes iQiyi''s branding and promotional expenses.
  • Research and development expenses were up 44% to $62 million (RMB 387 million). The company is hiring personnel to optimize the site and mobile app.

Seeing membership and advertising revenue outpace the associated costs is heartening. Excess profits can be reinvested into buying better content, which will result in more members and even more profits.

What management had to say

iQiyi founder and CEO Yu Gong had this to say about his company's first quarter in the public markets:

Both of our major business pillars, advertising services and membership services, generated significant growth driven by our premium content, especially a series of successful self-produced variety shows launched during the quarter. Our recent IPO positions us well for the exciting future ahead as iQIYI now enjoys higher brand recognition with increasingly more partners and artists around the world seeking to collaborate with us. Going forward, we will continue to strategically allocate our resources and bandwidth to original content production and technology innovation as we aspire to become a technology-based entertainment giant.

Looking forward

iQiyi is still reporting heavy losses, as the company continues to invest in building out its platform and filling it with premium content. But this subscription-based digital streaming business has the potential to do incredibly well.