iQiyi (NASDAQ:IQ) reported second-quarter earnings after the market close on Tuesday, delivering sales that came in significantly above the top range of management's targets. The Chinese streaming video company (which was spun off from Baidu in March) once again posted a substantial operating loss, though it expanded roughly proportionally with top line growth. The chart below outlines some key performance metrics for the quarter:

  Q2 2018 Q2 2017 YOY Change*
Revenue RMB 6.17 billion ($932.5 million) RMB 4.33 billion ($653.8 million) 51%
Operating loss RMB 1.33 billion ($200.7 million) RMB 0.99 billion ($149.7 million) N/A

Data source: iQiyi. RMB = Chinese renminbi. Figures converted at rate of RMB 6.6171 to $1. *Reflects accounting changes from the 2017 to 2018 period.

The 51% year-over-year revenue growth came in well ahead of the company's guidance for sales growth between 42% and 48%. On a U.S.-dollar basis, sales climbed from $737.1 million in the March-ended quarter to $932.5 million in the June-ended quarter, representing sequential growth of roughly 27%. Losses per ADS (American depositary share) improved from $2.07 in the first quarter to $0.45 in the June quarter.

A man lies on a couch watching streaming video on his tablet

Image source: Getty Images.

Impressive paid-user growth

iQiyi added 5.8 million subscribers in the quarter to reach 67.1 million members at the end of June. The company's cross-promotion membership deal with JD.com appears to have played a big role in the substantial subscriber growth. iQiyi announced a partnered membership drive with the online retailer early in May, and revealed that it had added a million new users to its paying member roles just a week after introducing the promo.

The company had just five million paying users in May 2015, so it's having considerable success getting customers on board with its premium service offerings. With the company's ad-supported platform included, iQiyi reaches over 400 million people. 

The table below outlines segment sales contribution and comparisons with the prior-year quarter:

Segment Revenue Q2 2018

Q2 2017

YOY Change*

Membership services RMB 2.47 billion ($374.0 million) RMB 1.58 billion ($238.7 million) 66%
Online advertising services RMB 2.62 billion ($395.6 million) RMB 1.91 billion ($288.4 million) 45%
Content distribution RMB 0.54 billion ($81.5 million) RMB 0.49 billion ($73.5 million) 18%
Others RMB 0.54 billion ($81.4 million) RMB 0.35 billion ($53.2 million) 62%

Data source: iQiyi. RMB = Chinese renminbi. Figures converted at rate of RMB 6.6171 to $1. *Reflects accounting changes from the 2017 to 2018 period.

As was to be expected, the rapid sales growth came at a cost. Cost of revenue climbed 47% year over year to reach RMB 6.1 billion (US$922.9 million) due primarily to rising content spending. Selling, general, and administrative expenses climbed roughly 51% year over year to land at RMB 949.9 million (US$143.6 million) -- with the increase stemming from increased channel marketing and content promotion and branding costs.

The company's operating loss margin narrowed to 22% from 24% in the prior-year period, however. iQiyi still has a long away to go before prioritizing profitability over sales growth, but the fact that it was able to deliver major revenue expansion without seeing margins slip is encouraging. 

What's next for iQiyi

Here's iQiyi CEO Yu Gong commenting on the quarter's results and plans for the business going forward:

Supported by our vast library of premium content and the premiere of a series of highly popular self-produced content, our membership and advertising businesses both generated robust growth during the quarter, with the total number of subscribing members reaching a new record high. Looking ahead, we will continue to invest in advanced technology, expand the breadth and depth of our content offerings, and nurture our entertainment ecosystem, as we pursue our innovative and diversified monetization model that fully leverages our premium content and IP value.

iQiyi is still ramping up its original content production. The company also looks to be making a bigger push into video games, having recently closed a deal to acquire developer Chengdu Skymoons at a price of roughly $300 million. The end goal for iQiyi is to build a comprehensive content ecosystem that brings together film and television programming, video games, and a heavy merchandise component to create a multimedia powerhouse that's reminiscent of what Walt Disney has accomplished.

This means that the company will likely continue to operate at a substantial loss in the near term. However, with the company rapidly expanding its paying user base and favorable economic and industry tailwinds at its back, the potential exists for the business to become profitable and deliver big wins for shareholders.

The company expects sales in the current quarter to come in somewhere between $985.3 million and $1.03 billion -- representing growth between 43% and 49% compared to the prior-year period.

Editor's note: An earlier version of this article contained an incorrect number for the Q1 per-share loss.

Keith Noonan owns shares of iQiyi and Walt Disney. The Motley Fool owns shares of and recommends Baidu, JD.com, and Walt Disney. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.