iQiyi (IQ -3.45%) is still shedding subscribers and seeing weaker advertising spending. But the company is taking big steps toward sustainable profitability.
The Chinese streaming content specialist recently announced operating results for the first quarter. The report didn't show impressive growth metrics, yet iQiyi's new content and pricing strategy is generating quick returns for the business.
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Growth trends
The growth picture darkened a bit in the first quarter. iQiyi boosted membership revenue by 4%, but those gains came entirely from higher subscription prices. The membership base declined to 101 million from 105 million a year ago, continuing the negative trend that investors have seen for several quarters.
Declines were even worse for advertising sales, which dove 30% in Q1 compared to a 10% drop in the previous quarter. Management blamed a tough macroeconomic environment, plus iQiyi's new strategy of releasing fewer shows, as the main factors pressuring advertising.
Overall, sales fell 9% after holding steady in the prior quarter. Management put an optimistic spin on results. "Our new strategy cemented our market leadership while yielding healthy financial performance," CEO Yu Gong said in a press release.
Financial wins
The financial side of the business did benefit from the restrained content release schedule, cost cuts, and increased prices. iQiyi's gross profit margin rose to a record for the business, approaching 12% of sales.
IQ Gross Profit Margin data by YCharts
Non-GAAP (adjusted) operating income was positive to mark a solid rebound from losses a year ago. CFO Jun Wang highlighted the company's falling expenses as a factor driving higher earnings. The company cut costs mainly by slowing down new content production as the company shifts its focus toward profitable growth.
iQiyi still burned through lots of cash, but the company was happy to celebrate achieving a 4% adjusted profit margin in Q1 compared to an 8% loss a year ago.
The path forward
A slower release schedule is clearly pressuring growth, both by reducing advertising opportunities and limiting iQiyi's new member additions. It's not clear yet that this is a good long-term trade-off, even if the strategy immediately boosted earnings.
Investors should watch iQiyi's sales trends over the next few quarters for signs that the business is stabilizing at a higher profitability. If the company can achieve steady membership growth while keeping a lid on content costs, then the streaming business could be on a firmer footing. Membership declines haven't been accelerating in recent quarters, which suggests that the business could stabilize in 2022 and perhaps return to modest growth next year.
For now, though, iQiyi is only succeeding on the cost cut side of that equation. The stock likely won't erase its 2021 losses until that rebound seems more complete. That's why investors might want to consider more successful players in the streaming video niche.
