China’s iQiyi Sees a 58% Increase in Subscriber Base but Losses Widen

Chinese video streaming company iQiyi, an arm of China major Baidu known as China’s Netflix, reported first quarter earnings Thursday after the close. The net loss widened to RMB 1.8 billion ($270.3 million), smaller than expected but with revenue lower than expected.

Chinese video streaming company iQiyi, an arm of China major Baidu known as China’s Netflix, reported first quarter earnings Thursday after the close. The net loss widened to RMB 1.8 billion ($270.3 million), smaller than expected but with revenue lower than expected.


iQiyi went public in March last year raising $2.375 billion, the biggest IPO since Snap’s $3.4 billion last year.

Baidu $BIDU is the majority owner.

IQIYI Inc NASDAQ: IQ Reported Earnings After Close Thursday

(0.35) Beat $(0.52) EPS Exp as Revenue of $1.0 B MISSED $91.03  Billion Revenue Forecast


iQiyi Inc (NASDAQ: IQ) reported a 43% increase in first-quarter revenue to RMB 7 billion ($1 billion). which came in under analysts projected revenue of $1.03 billion.

The net loss attributable to iQiyi widened to RMB 1.8 billion ($270.3 million), from RMB 395.7 million in the same period last year, as higher costs of producing original content weighed on the bottom line. On a per share basis, the company lost RMB 2.52 ($0.35), narrower than the street expectation of $0.52 loss.


Market Reaction Pre-market $19.05 −1.33 (6.53%)


CEO Yu Gong said, “Our strategy remains focused on producing high-quality original content and refining our IP-centered content ecosystem which will be the key drivers for our future growth. As China’s online entertainment industry is entering a new phase of growth, we believe we are well-positioned to capture the enormous opportunities for us in the years to come.”

  • A 58% increase in subscriber base.
  • At the end of the first quarter, iQiyi had 96.8 million subscribers, of which over 98.6% were paying members. 

iQiyi financial performance trend 1Q19

iQiyi has penetration, last year’s street dance competition series Hot-Blood Dance Crew attracted over 1.8 billion views and generated 650 million yuan ($95 million), breaking records for online ad revenue, the number of sponsors, and quickest ad sellout for an online variety show.

Strategic Partnerships

iQiyi has strategic partnerships with some of China’s most well-known companies. Last year, the company signed a deal with e-commerce provider that offers the premium benefits from both platforms to the subscribers of either for a period of one year.

Gong said the streaming provider also deepened its relationship with China Mobil, introducing combined memberships and mobile video data packages that include the state-owned company’s video-streaming service MIGU. The app provides a wide variety of digital content aimed at Chinese teens, including anime, comics, video games, and music. The platform is home to more than 17 million songs, 4.3 million videos, 1,200-plus live-streaming events, 30,000 games, and 470,000 anime titles.

The company expanded its relationship with online travel company Ctrip, which enables iQiyi premium members to use a number of priority travel services. These include access to VIP airport lounges and priority access to discounted hotel bookings, vehicle reservations, the purchasing of train tickets, and free entry to a number of sightseeing attractions. Additionally, Ctrip Prime members benefit from an eight-month VIP membership with iQiyi.

Each of these partnerships facilitates the cross-selling of services, helping to fuel iQiyi’s growing subscriber numbers.


For the second quarter, iQIYI expects total net revenues to be between RMB 6.91 billion ($1.0 billion) and RMB 7.29 billion ($1.1 billion), representing a 12-18% increase from the same period in 2018.


  • $IQ plans to offer 125 million American depository shares at a price range of 17 to 19.
  • The company will list under the symbol $IQ on the NASDAQ
  • Chinese search leader Baidu (BIDU) is the majority owner of iQiyi,
  • The company has been referred to as the Netflix (NFLX) of China.
  • With 50 million subscribers, iQiyi has nearly 28% market share in China,
  • Rivals Alibaba $BABA and Tencent $CEHY$ have their own streaming services 

The previous biggest deal was Brazilian fintech PagSequro Digital Ltd.’s $PAGS $2.27 billion deal in January.$IQ would be the highest-value IPO since Snapchat parent Snap Inc. $SNAP went public last March in a $3.4 billion deal.

Biggest Chinese IPOs in 2018


Goldman Sachs (Asia), Credit Suisse, Bank of America Merrill Lynch, China Renaissance, Citigroup and UBS have an option to sell an additional 18.75 million shares.

About iQiyi

iQiyi $IQ was created in 2010, and has since grown to be the largest internet video streaming service in China , measured by monthly average users (MAUs) in 2017, according to Chinese third-party research firm iResearch per their prospectus.

The company had 60.1 million subscribing members as of Feb. 28, more than 98% of which were paying subscribers. By comparison, Netflix Inc. $NFLX had roughly 53 million paying subscribers in the U.S. in the fourth quarter, and 58 million overseas subscribers.

For the three months ending with December, iQiyi had average mobile MAUs of 421.3 million and about 126 million average mobile DAUs (daily average users). In December alone, members watched 9.2 billion hours of video on the platform and spent an average of 1.7 hours a day on its mobile apps.

The company makes its money from subscription fees, advertising on the platform and content distribution. Proceeds of the IPO are to be used to expand content offerings and strengthen technologies and for working capital and other general corporate purposes. But the IPO is also intended as a way to get the brand name better known and attract and retain employees by offering them equity awards, according to the prospectus.

iQiyi’s original content is popular in China, accounting for six of the top 10 original internet drama series in the country in 2017, according to iResearch. “The Lost Tomb,” a high-budget drama series released in 2015, drew more than 100 million video views in the first 24 hours of release, and has generated more than 4 billion views in total.

$IQ also produces internet variety shows, including “The Rap of China,” an “X Factor”–style rap reality show and competition, which has generated more than 3 billion video shows.

Video is the leading online entertainment format in China, accounting for more than 80% of the time spent online, and the number is expected to grow as more consumers come online. China’s internet video users have grown to 545 million in 2016 from 372 million in 2012, and that number is expected to grow to 766 million by 2022, according to the prospectus.

The Risks of Investing in IQ

Baidu will remain in control

The company has a dual-share-class structure, and Baidu $BIDU will own all of the company’s higher-voting-rights Class B shares once the offer is completed.  Meaning despite going public $BIDU will remain$IQ’s controlling shareholder, with more than 93% of voting rights.

Analysts so far see this as a positive, as Baidu is one of China’s better-known names and is a key technological partner for iQiyi.

However, “Baidu’s voting control may cause transactions to occur that might not be beneficial to you as a holder of ADSs and may prevent transactions that could have been beneficial to you,” the company cautions in its prospectus.

 iQiyi has an unusual risky corporate structure

Chinese companies listings outside of China favor variable-interest entity, or VIE as a structure created in the 1990s as a workaround for Chinese companies not allowed to have direct foreign ownership. This is what $IQ is.

Under the VIE structure, the Chinese company creates two entities, one in China that holds the permits and licenses needed to do business there and the other an offshore entity, in this case in the Cayman Islands, in which foreign investors can buy shares. The Chinese entity, which is usually owned by top executives, pays fees and royalties to the offshore company in contractual arrangements.

The biggest example of a VIE is Alibaba Group Holding Ltd. $BABA in which the Chinese entity is wholly owned by its founder and chairman, Jack Ma. The risk with this set-up is that foreign investors don’t actually own stock in the company, and local management or even the Chinese government could decide or force a split with the listed company, leaving U.S. investors empty. Not out of the realms of possibilities with the U.S.. slapping $60 billion worth of tariffs on China. 

The iQiyi prospectus acknowledges that risk: “If the PRC (People’s Republic of China) government finds that the agreements that establish the structure for operating certain of our operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.” ‘

iQiyi has NEVER made a profit

While iQiyi is growing revenue fast, up to $2.67 billion in 2017, or 55%in a year. It has the cash burn problem that $NFLX has. $IQ lost $574 million last year, up 22% from the prior year.

The prospectus projects this burn to go on for a while yet. $IQ’s cost of revenue was $2.67 billion in 2017, the same as its revenue. Content costs rose 67% to $1.94 billion, and bandwidth cost rose 17% to $336 million.

The company is expecting cost of revenue to continue to grow and to exceed revenue growth at least in the near term. “

We face significant competition in China, primarily from Tencent Video and Youku Tudou,” according to the prospectus.

“We compete for users, usage time and advertising customers. Some of our competitors have a longer operating history and significantly greater financial resources than we do. If any of our competitors achieves greater market acceptance than we do or is able to offer more attractive video content, our business, financial condition and results of operations may be materially and adversely affected.”

The company does not intend to pay a dividend in the near future, so shareholders will rely entirely on the ADS appreciating in price.

The Burn Rate means iQiyi Will Need More Funding SOON

“Producing high-quality original content is costly and time-consuming and it will typically take a long period of time to realize returns on investment, if at all,” said the prospectus.

Like Netflix, iQiyi relies heavily on algorithms, artificial intelligence and user data to select third-party content and has built a substantial library.

The huge positive here is Baidu providing it technology, infrastructure and financial help. BUT the prospectus states, “we have no experience operating as a stand-alone public company. After this offering, we will face enhanced administrative and compliance requirements, which may result in substantial costs.”

Be prepared and be sure this is the risk you want to take on.

Source: AlphaStreet

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