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iQIYI (IQ) Q1 Loss Narrower Than Expected, Revenues Rise Y/Y

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iQIYI (IQ - Free Report) reported first-quarter 2019 adjusted loss of 35 cents per share. The loss was narrower than the Zacks Consensus Estimate of a loss of 52 cents.

In domestic currency, the company reported loss of RMB2.52 per ADS.

Revenues surged 43% from the year-ago quarter to RMB6.99 billion ($1 billion).

As of Mar 31, 2019, total subscribers increased 57.9% year over year to 96.8 million. Of this 98.6% were paid subscribers. The number of total subscribers was higher than 61.3 million as of Mar 31, 2018.

iQIYI, Inc. Sponsored ADR Price, Consensus and EPS Surprise

iQIYI, Inc. Sponsored ADR Price, Consensus and EPS Surprise

iQIYI, Inc. Sponsored ADR price-consensus-eps-surprise-chart | iQIYI, Inc. Sponsored ADR Quote

Top-Line Details

Membership revenues surged 64% year over year to RMB3.4 billion ($513.4 million), driven by strong subscriber growth, premium content and operational initiatives taken by iQIYI.

The company released a number of premium content in the reported quarter including The Legend, House of Holland and The Golden Eyes, which aided subscriber growth.

Moreover, in second-quarter 2019, iQIYI released The Legend of White Snake and The Thunder. Notably, The Thunder received overwhelming response in China and is anticipated to be launched for the international audience through AT&T’s (T - Free Report) HBO.

Online advertising services revenues were RMB2.1 billion ($315.8 million), flat from the year-ago quarter. Revenues remained flat due to unfavorable “macroeconomic environment in China and slower-than-expected recovery of in-feed advertising.” iQIYI’s self-produced show Idol Producer 2 aided ad revenues, which reached a new high.

Notably, iQiyi has maintained a wary outlook on advertising business as it expects the sluggish macroeconomic environment to continue in the near term. However, the company anticipates its advertising business to benefit from premium content and innovative ad solutions.

Content distribution revenues increased 66% to RMB442.6 million ($66.0 million). Increased number of premium content drove segment top-line growth. iQIYI noted that it will continue to produce high quality original content to aid business growth.

Other revenues were RMB982.5 million ($146.4 million), up 143%, driven by strong performance across various vertical business lines, primarily the company’s gaming business. Notably, iQIYI’s gaming business strengthened post its acquisition of Skymoons. Additionally, Skymoons launched many successful games in the reported quarter.

In the reported quarter, iQIYI’s mobile average daily average user (DAU) and user engagement levels recorded double-digit growth from the year-ago period. Notably, the company attained the top spot again among the online video platforms in China in terms of mobile DAU and user engagement levels.

Operating Details

In first-quarter 2019, cost of revenues increased 50% year over year to RMB7.3 billion ($1.1 billion). The increase was primarily attributed to higher content costs and other cost items. Notably, content costs increased 38% to RMB5.3 billion ($793.9 million).

Selling, general and administrative expenses surged 62% year over year to RMB1.1 billion ($170.0 million) primarily due to higher marketing spending and increase in share-based compensation expenses.

Research and development expenses were RMB598.1 million ($89.1 million), up 54% primarily due to higher personnel-related compensation expenses.

Operating loss was RMB2.0 billion ($301.9 million), higher than operating loss of RMB1.1 billion million in the year-ago quarter.

Balance Sheet

As of Mar 31, 2019, cash and cash equivalents, restricted cash and short-term investments were RMB17.9 billion ($2.7 billion) compared with RMB12.8 billion ($1.9 billion) as of Dec 31, 2018.

Guidance for 2Q19

iQIYI expects total revenues between RMB6.91 billion ($1.0 billion) and RMB7.29 billion ($1.1 billion). The top line is expected to grow 12-18% year over year.

Zacks Rank & Stocks to Consider

iQIYI currently has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader consumer discretionary sector are lululemon athletica inc. (LULU - Free Report) and V.F. Corporation (VFC - Free Report) . While lululemon athletica sports a Zacks Rank #1 (Strong Buy), V.F. Corporation carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for lululemon athletica and V.F. Corporation is pegged at 18.4% and 11.4% respectively.

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