IQIYI Inc (NASDAQ: IQ) is a leading online video platform based in China. It is often referred to as the “Netflix of China” given the similarities in their business models.
Last week, the company reported its second-quarter results. Here are three things that investors should know from the earnings release.
1. Subscription business
The subscription business is the largest segment within IQIYI, accounting for 54% of its latest quarterly revenue.
Overall, this business delivered some good numbers in the latest quarter. Membership revenue improved 19% year-over-year to reach RMB 4.0 billion (US$577.1 million) thanks to the growth in paying members.
Total subscribing users reached 104.9 million, up 4% year-over-year, amid an improvement in monetisation.
Personally, this business segment has good potential to grow its top line, considering that out of IQIYI’s more than 550 million monthly active users (MAUs), only 104.9 million are currently paying members.
2. Advertising business
The second-largest revenue stream for IQIYI is its online advertising income.
This segment continued to face significant challenges in the latest quarter owing to the challenging economic environment in China.
Consequently, online advertising revenue plunged 28% year-on-year to RMB 1.6 billion – in the previous quarter revenue fell by 27% year-on-year.
As China has opened up its economy post-Covid-19 lockdown, this part of the business should gradually recover over time.
Yet, investors should not expect a rapid recovery since many companies are still facing challenges, and will likely be cautious in their advertising spending.
3. SEC investigation
In April 2020, short-seller Wolfpack released a report (Wolfpack Report) alleging issues about the company, which include manipulation of sales revenue and expenses.
To address the allegations, IQIYI is cooperating with the US regulator, SEC, in its investigation on the issues highlighted by the report.
Also, the company has engaged professional advisers to conduct an internal review into the allegations and to report their findings to the audit committee.
So far, IQIYI has not given any guidance on when the investigations – both internally and by SEC – will end.
Nevertheless, I would keep a close eye on the outcome since it will have a material impact on the company’s reputation and business continuity (as well as share price).
Forward guidance
In the coming quarter, IQIYI expects total net revenues to be between RMB 6.95 billion and RMB 7.40 billion, representing a 6% decrease to flat year-on-year.
Such expectations dwarf the company’s historical performance, which has been categorised by double-digit growth.
Thus, investors should pay close attention to the coming quarters to assess whether the current financial situation is temporary or permanent.
If it’s the latter, IQIYI’s stock price might come under significant pressure as the market reassesses the appropriate valuation for the company.