iQIYI, Inc. — FY2018 Form 20-F
Reporting period: Year ended December 31, 2018. This is an annual report, not a standalone 2018 fourth-quarter filing; the provided filing text does not give clear standalone Q4 financial results. Figures are U.S. GAAP and primarily in RMB; 2018 U.S. dollar translations use RMB6.8755 per US$1.
Business context
iQIYI operates a Chinese online entertainment platform, monetized principally through memberships, online advertising, content distribution and other services. It reported 454.5 million average mobile monthly active users and 135.4 million average mobile daily active users in 2018. Members averaged 87.4 million at year-end, up 72% from 50.8 million a year earlier.
Financial and operating metrics
| Metric | FY2018 | Comparison / context |
|---|---|---|
| Revenue | RMB24.99 billion (US$3.63 billion) | Up 52.4% from 2017 revenue restated by management to exclude VAT for comparison. |
| Membership revenue | RMB10.62 billion | Up 72.3% on the comparable VAT-adjusted 2017 basis; 42.5% of 2018 revenue. |
| Online advertising revenue | RMB9.33 billion | Up 21.2% on the comparable basis; 37.3% of revenue. Growth slowed from 44.4% in 2017. |
| Content distribution revenue | RMB2.16 billion | Up 92.3% on the comparable basis. |
| Operating loss | RMB8.31 billion | Operating margin: negative 33.3%. |
| Net loss | RMB9.06 billion (US$1.32 billion) | Net margin: negative 36.3%; versus a RMB3.74 billion loss in 2017. |
| Gross loss | RMB2.14 billion | Versus RMB8.2 million in 2017 on the comparable basis. |
| Operating cash flow | RMB2.88 billion | Down from RMB4.01 billion in 2017. |
| Investing cash flow | Negative RMB20.95 billion | Included substantial copyright purchases, short-term investment activity and the Skymoons acquisition. |
| Financing cash flow | RMB23.47 billion | Included IPO proceeds and convertible-note and loan financing. |
Costs and margins: Cost of revenues rose 65.4% to RMB27.13 billion, exceeding revenue growth. Content cost increased 66.9% to RMB21.06 billion; bandwidth cost rose 8.9% to RMB2.38 billion. Selling, general and administrative expenses increased 56.4% to RMB4.17 billion, and research and development expenses rose 57.1% to RMB1.99 billion. The filing says rising content investment drove gross losses and that management cannot accurately predict when gross profit or overall profitability will be achieved.
Liquidity and debt: At year-end, cash and cash equivalents were RMB4.59 billion, restricted cash RMB2.17 billion and short-term investments RMB6.06 billion. Current assets were RMB19.85 billion versus current liabilities of RMB19.81 billion, a narrow working-capital surplus. Accounts payable were RMB10.16 billion, primarily owed to content providers. Debt included RMB3.05 billion of short-term loans, RMB644 million of long-term loans and convertible senior notes with a RMB4.71 billion carrying amount; the notes have US$750 million principal, bear 3.75% annual interest and mature in December 2023. The company also reported a RMB700 million interest-free loan from Baidu.
Other key items: Total assets were RMB44.76 billion and total liabilities RMB26.60 billion. Shareholders’ equity was RMB18.16 billion at year-end, following the IPO and conversion of preferred shares. Share-based compensation increased to RMB556 million from RMB233 million in 2017.
Material changes and comparability
- Revenue increased 52.4% on management’s comparable basis, while net loss more than doubled and operating margin deteriorated from negative 22.7% to negative 33.3%.
- ASC 606 was adopted on January 1, 2018. It moves VAT from cost of revenues to a deduction from revenue; 2018 revenue is net of RMB1.46 billion VAT, while reported 2016–2017 figures are not. Management’s year-over-year comparisons adjust 2017 for VAT. Adoption also increased opening accumulated earnings by RMB916 million, primarily due to earlier recognition of advertising revenue.
- iQIYI completed its IPO in April 2018, receiving net proceeds of RMB14.90 billion. All redeemable convertible preferred shares converted to ordinary shares.
- In July 2018, the company acquired Skymoons, a mobile-games business. The filing records RMB375 million of post-acquisition revenue and RMB238 million of net loss from Skymoons in 2018.
- In December 2018, iQIYI issued US$750 million of convertible senior notes and bought capped-call options for US$67.5 million.
Outlook, risks and contingencies
Management expects content, bandwidth, marketing, technology and personnel costs to continue rising as the platform grows. It stated that available cash, restricted cash, short-term investments, financing resources and anticipated operating cash flows were expected to cover working-capital needs and capital expenditures for at least 12 months, while cautioning that additional financing may be needed. Contractual obligations totaled RMB31.73 billion, including RMB23.58 billion of minimum payments for licensed content and produced content.
- Profitability and content investment: Content prices and production costs may rise faster than revenue; high-cost content may not attract sufficient users or generate returns.
- Revenue exposure: Advertising growth slowed, and advertisers may reduce budgets. Membership growth depends on popular content, retention and competition.
- Regulation and corporate structure: Most operations are conducted through PRC variable interest entities (VIEs) under contractual arrangements. Their enforceability and treatment under PRC rules remain uncertain; the company also disclosed licenses and service approvals that were pending or being expanded.
- Legal matters: As of December 31, 2018, 60 copyright-related cases against the company were pending, with approximately RMB121.2 million in claimed damages. The company accrued RMB19.1 million for litigation and said it could not estimate possible losses for certain early-stage or uncertain cases. It also had 1,104 cases pending that it brought against others.
- Financing, currency and governance: RMB depreciation contributed to foreign-exchange losses. Baidu held 92.9% of voting power as of February 2019, and the company relied on controlled-company and foreign-private-issuer governance exemptions. The auditor was not subject to PCAOB inspections in China, as described in the filing.
Important facts for investors to verify
- Compare revenue and margins using consistent VAT treatment; do not treat reported 2017 revenue as directly comparable with 2018.
- Track whether membership growth and monetization can offset content spending, especially as advertising growth slows.
- Review cash availability and restrictions, debt maturities and interest, working capital, and the large content-purchase commitments.
- Assess whether the VIE arrangements, required operating permits and evolving PRC rules could affect control of or access to operating assets and cash.
- Monitor the outcomes and accruals for pending litigation, and the dilution or repayment implications of convertible notes and equity awards.