Business context and reporting period
iQIYI, Inc. filed this Form 20-F annual report for the fiscal year ended December 31, 2020; it is not a standalone fourth-quarter report. The company operates a China-focused online entertainment platform, earning revenue mainly from subscriptions, advertising, content distribution and other services. Financial statements are prepared under U.S. GAAP and presented primarily in RMB. USD figures below are the filing’s translations.
At year-end, iQIYI reported 101.7 million subscribing members, 479.8 million average mobile monthly active users and 115.6 million average mobile daily active users for 2020. The company states that these user measures rely on internal data and are not independently verified.
Financial and operating metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | RMB29.71bn (US$4.55bn) | RMB28.99bn |
| Gross profit/(loss) | RMB1.82bn; 6.1% margin | Loss of RMB1.35bn; (4.7%) margin |
| Operating loss | RMB6.04bn; (20.4%) margin | RMB9.26bn; (31.9%) margin |
| Net loss | RMB7.01bn (US$1.07bn); (23.7%) margin | RMB10.28bn; (35.4%) margin |
| Net cash from/(used in) operating activities | Use of RMB5.41bn | Provided RMB3.91bn |
| Cash, cash equivalents and restricted cash | RMB10.94bn (US$1.68bn) | RMB6.91bn |
| Short-term investments | RMB3.36bn (US$0.51bn) | RMB4.58bn |
| Total liabilities | RMB38.74bn | RMB35.08bn |
| Current assets / current liabilities | RMB22.29bn / RMB24.85bn | RMB20.27bn / RMB20.17bn |
Membership revenue rose 14.2% to RMB16.49bn and represented 55.5% of revenue. Online advertising fell 17.5% to RMB6.82bn (23.0% of revenue); content distribution increased 4.6% to RMB2.66bn; other revenue was broadly flat at RMB3.73bn. Cost of revenue declined 8.1% to RMB27.88bn, including content costs of RMB20.89bn and bandwidth costs of RMB2.45bn. Selling, general and administrative expense was RMB5.19bn and research and development expense was RMB2.68bn.
Debt included RMB16.68bn net carrying value of convertible senior notes, of which RMB4.75bn was classified as current, plus RMB2.97bn of short-term loans and RMB0.91bn of current long-term loans. The filing also reports RMB0.70bn outstanding in interest-free loans from Baidu. Current liabilities exceeded current assets by RMB2.56bn. Financing activities provided RMB9.37bn, including proceeds from the 2026 notes and a follow-on ADS offering; investing activities provided RMB0.16bn. Year-end cash, cash equivalents and restricted cash increased by RMB4.03bn.
Material changes versus the prior comparable period
- Revenue grew 2.5%, while the net loss narrowed by RMB3.27bn. Operating loss also narrowed, and the company moved from a gross loss to gross profit.
- Membership revenue increased despite year-end subscribing members declining 4.9% year over year to 101.7 million. Members had peaked at 118.9 million at March 31, 2020.
- Advertising revenue continued to contract, though management said it had rebounded from the second quarter as advertisers recovered budgets.
- Operating cash flow shifted from a RMB3.91bn inflow to a RMB5.41bn outflow. This comparison is materially affected by adoption of ASU 2019-02: content-rights acquisition cash outflows moved from investing to operating activities in 2020. The filing reports RMB17.01bn of cash paid for content in 2020.
- The company revised estimated content viewership patterns and useful lives, reducing 2020 amortization expense and net loss by RMB680m. This is a material accounting estimate change in interpreting the gross-profit improvement.
Outlook, commentary, risks and unusual items
No quantified revenue, earnings or cash-flow guidance is provided. Management said current cash, short-term investments, available financing and anticipated operating cash flows should cover working-capital requirements and capital expenditures for at least the next 12 months, while warning that additional capital may be needed. It expects continued investment in content, technology and overseas expansion; cost of revenue may rise, and sustained profitability cannot be predicted.
- Content and impairment: Management recorded RMB390m of licensed-content impairment and RMB210m of produced-content impairment for the Mainland China film group following COVID-related forecast reductions, plus RMB205m impairment on certain individually monetized produced content. The auditors identified content impairment and content amortization as critical audit matters.
- COVID-19 and advertising: Pandemic-related demand initially supported member growth, but year-end membership declined; content scheduling disruptions and a challenging economy weighed on advertising revenue. The company says future effects remain uncertain.
- Legal and regulatory exposure: The SEC sought company records following the 2020 Wolfpack Research report. An internal review within its agreed scope found no evidence substantiating the report’s allegations; the SEC inquiry remains unresolved. Three putative U.S. securities class actions remained at preliminary stages, and the company could not estimate possible losses. At year-end, 380 Chinese platform-related cases were pending, with RMB269.1m in damages sought; management could not estimate a reasonably possible loss.
- Capital and liquidity: Holders of the 2023 notes could require cash repurchase on December 1, 2021, contributing to the current-liability classification and working-capital deficit. The filing lists RMB21.88bn of purchase obligations, primarily for content and related commitments.
- Corporate structure: Most China operations are conducted through variable-interest entities under contractual arrangements rather than direct ownership. Changes in PRC interpretation or enforcement could impair control of, or access to the economics of, those operations.
- Other risks: The filing highlights intense competition, dependence on hit content and advertising agencies, content approval and licensing requirements, data security and privacy, foreign-exchange exposure, and risks from Baidu’s controlling voting position. Baidu held 91.6% of voting power as of February 28, 2021.
The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective as of year-end. The filing notes that the auditor was not then subject to PCAOB inspection in China and discusses potential U.S. listing consequences if inspection requirements were not met.
Most important facts for investors to verify
- Whether the gross-profit improvement is repeatable after separating lower content spending and the RMB680m amortization-estimate benefit from underlying monetization trends.
- Whether operating cash flow can recover after the content-cost cash-flow reclassification, and how much of reported liquidity is accessible within the group and in China.
- Debt repayment and refinancing capacity, particularly the 2023 notes’ December 2021 repurchase right, short-term loans and significant content purchase commitments.
- Whether subscription growth and advertising recovery can offset the year-end decline in members and continued advertising-revenue weakness.
- Developments in the SEC investigation, U.S. securities litigation and Chinese copyright cases, including any subsequent loss estimates or outcomes.
- Continuing validity and enforceability of the VIE arrangements, content permits, and U.S. audit-inspection and listing requirements.