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iQiyi reported another quarter of strong growth in both membership and advertising. But it's also spending quite heavily on original programming.
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China's leading digital media provider, iQiyi (IQ +0.06%), recently reported fourth-quarter results that gave investors reason to applaud. The business makes money in two ways: from paid subscription memberships and from free content supported by advertising.
Revenue from both segments rose in the most recent quarter, boosting the company's quarterly sales above $1 billion for the first time in its history. But iQiyi's content costs are also growing rapidly, which pushed its net income further into the red.
Let's grab some popcorn and take a closer look at the results.
Check out the latest earnings call transcript for iQiyi.
| Metric | Q4 2018 | Q4 2017 | Year-Over-Year Change |
|---|---|---|---|
| Revenue | $1 billion | $700 million | 43% |
| Operating income | ($483 million) | ($125 million) | N/A |
| Earnings per ADS | ($4.83) | ($1.12) | N/A |
iQiyi's rising user base is helping its subscription business grow quickly. But it is also liberally spending on premium content to attract those members, causing this segment -- as well as the entire business -- to operate at a steeper loss.
After falling 4% last quarter, iQiyi's advertising business returned to growth mode this time around. It continues to generate enough revenue to cover all of the company's total research, sales, and marketing expenses.
iQiyi founder and CEO Yu Gong pointed out several of the company's 2018 accomplishments on the conference call. He also noted its interest in developing content of its own:
Our subscriber numbers constantly hit new highs; and our revenues continued to scale and diversify. 2018 was also a transition year for us. As we shifted more resources toward producing original content, we believe it will help us build a stronger platform and IP powerhouse over the long term.
iQiyi is doing a great job of partnering with others to attract new subscribers. Premium members of JD.com, China Mobile, and Ctrip get privileged access to iQiyi's content free of charge (though the companies still pay per member, and members are included in iQiyi's subscriber count). iQiyi also offers special perks from other service providers to its own paying subscribers.
Developing original content is more expensive than purchasing rights to existing movies. iQiyi's commitment to creating original material suggests that its content costs will continue to grow significantly and will outpace membership revenue for quite some time. The long-term benefit of having exclusive homegrown content could be worth the up-front cost, as a way to woo subscribers away from large competitors like Tencent and Alibaba, which have deep enough pockets to outbid iQiyi for others' content.
As in previous quarters, I continue to monitor the spread between the growth rates of membership revenue and content costs. If revenue grows faster than content costs, it is a sign that iQiyi is scaling as a business. Membership revenue grew 76% this quarter and content costs rose by 97% -- a 21-percentage-point difference. This is the opposite of what investors want to see.
However, this is also admittedly just for a single quarter and investors will need to watch how things evolve.