iQIYI(IQ) - 2023 Q4 - Annual Report

PART I ITEM 3. KEY INFORMATION This section outlines iQIYI's VIE-based corporate structure, key financial data, and significant operational and regulatory risks - iQIYI, Inc. is a Cayman Islands holding company, not a Chinese operating company. It conducts its operations in mainland China through subsidiaries and Variable Interest Entities (VIEs) via contractual arrangements. Investors purchase equity in the Cayman holding company, not the Chinese operating entities[30] - Revenues from the VIEs accounted for 94%, 92%, and 92% of total revenues for the fiscal years 2021, 2022, and 2023, respectively, highlighting the company's heavy reliance on this structure[30] - The company faces risks related to PRC government oversight, including potential challenges to the legality of its VIE structure, cybersecurity reviews, and requirements for CSRC approval for offshore listings, which could materially impact operations and stock value[41][43] - Cash transfers from mainland China entities to offshore entities are subject to PRC government controls on currency conversion and restrictions on dividend payments, which may limit the holding company's ability to fund operations or distribute dividends to shareholders[44][47] Selected Consolidated Financial Data Selected Consolidated Statements of Comprehensive (Loss)/Income Data (2021-2023) | | 2021 (RMB) | 2022 (RMB) | 2023 (RMB) | | :--- | :--- | :--- | :--- | | Total revenues | RMB 30.55 billion | RMB 29.00 billion | RMB 31.87 billion | | Operating (loss)/income | (RMB 4.48 billion) | RMB 1.31 billion | RMB 2.99 billion | | Net (loss)/income | (RMB 6.11 billion) | (RMB 117.8 million) | RMB 1.95 billion | | Net (loss)/income attributable to ordinary shareholders | (RMB 6.19 billion) | (RMB 136.2 million) | RMB 1.93 billion | | Diluted Net (loss)/income per ADS | (RMB 7.77) | (RMB 0.16) | RMB 1.98 | Selected Consolidated Balance Sheet Data (as of Dec 31, 2022 & 2023) | | 2022 (RMB) | 2023 (RMB) | | :--- | :--- | :--- | | Total assets | RMB 46.05 billion | RMB 44.59 billion | | Total liabilities | RMB 39.70 billion | RMB 32.41 billion | | Total shareholders' equity | RMB 6.34 billion | RMB 12.18 billion | Selected Consolidated Cash Flows Data (2021-2023) | | 2021 (RMB) | 2022 (RMB) | 2023 (RMB) | | :--- | :--- | :--- | :--- | | Net cash (used for)/provided by operating activities | (RMB 5.95 billion) | (RMB 70.6 million) | RMB 3.35 billion | | Net cash provided by/(used for) investing activities | RMB 1.26 billion | RMB 266.0 million | (RMB 1.74 billion) | | Net cash (used for)/provided by financing activities | (RMB 2.96 billion) | RMB 4.47 billion | (RMB 4.29 billion) | Risk Factors - The company identifies several major risk categories: business and industry risks (e.g., content costs, competition), corporate structure risks (reliance on VIEs), relationship with controlling shareholder Baidu (e.g., conflicts of interest), risks of doing business in China (e.g., regulatory oversight, HFCAA), and risks related to its ADSs (e.g., price volatility)[75][76][78] ITEM 4. INFORMATION ON THE COMPANY This section details iQIYI's business history, content strategy, diversified monetization, technology use, and the complex Chinese regulatory environment History and Development of the Company - iQIYI launched its internet video streaming service in April 2010. The holding company was incorporated in the Cayman Islands in November 2009[302] - The company operates its core business in mainland China through Variable Interest Entities (VIEs) like Beijing iQIYI and Shanghai Zhong Yuan to comply with PRC regulations[303] - The company's American Depositary Shares (ADSs) began trading on the Nasdaq Global Select Market under the symbol "IQ" on March 29, 2018[305] Business Overview - iQIYI is a leading online entertainment video service provider in mainland China, focusing on premium content, particularly original dramas and variety shows. In 2023, original drama series accounted for 75% of newly released dramas with a popularity index score over 9,000[309][310] Key Membership Metrics (2023) | Metric | Value | | :--- | :--- | | Average Daily Total Subscribing Members | 111.9 million | | Monthly Average Revenue per Membership (ARM) | RMB 15.13 | | YoY Growth in Monthly ARM | 5.7% | - The company has a diversified monetization model including membership services, online advertising (brand and performance-based), content distribution, online games, IP licensing, and talent agency services[311][329] - iQIYI is expanding its overseas business through its multilingual app, featuring popular Chinese content (C-pop) and local content to cater to a global audience, aiming to become a home for beloved Asian content[326] Organizational Structure - To comply with PRC laws restricting foreign ownership in telecommunications and internet audio-video services, iQIYI conducts its business in mainland China through VIEs based on a series of contractual arrangements[471] - The contractual arrangements enable iQIYI, Inc. to direct the activities of the VIEs, receive their economic benefits, and hold an exclusive option to purchase their equity and assets, making it the primary beneficiary for accounting consolidation purposes[472] - Key agreements in the VIE structure include Loan Agreements, Share Pledge Agreements, Exclusive Purchase Option Agreements, Shareholder Voting Rights Trust Agreements, and Exclusive Technology Consulting and Services Agreements, which collectively give the company effective control over the VIEs[473][474][475] Property, Plants and Equipment - The company's principal executive offices are leased in Beijing, covering approximately 30,074 square meters. It also owns office premises in Shanghai (17,570 sq. meters) and land in Zhejiang Province (101,722 sq. meters)[494] - iQIYI's main IT infrastructure includes internet data centers (IDCs) and content delivery networks (CDNs). It leases IDC facilities from major state-owned operators like China Telecom, China Unicom, and China Mobile[494] ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section analyzes iQIYI's financial performance, highlighting 2023 profitability, revenue growth, improved efficiency, liquidity, and R&D investment Operating Results Revenue Breakdown (2021-2023) | Revenue Source | 2021 (RMB) | 2022 (RMB) | 2023 (RMB) | 2023 (% of Total) | | :--- | :--- | :--- | :--- | :--- | | Membership services | RMB 16.71 billion | RMB 17.71 billion | RMB 20.31 billion | 63.7% | | Online advertising services | RMB 7.07 billion | RMB 5.33 billion | RMB 6.22 billion | 19.5% | | Content distribution | RMB 3.01 billion | RMB 2.56 billion | RMB 2.46 billion | 7.7% | | Others | RMB 3.77 billion | RMB 3.39 billion | RMB 2.88 billion | 9.1% | | Total revenues | RMB 30.55 billion | RMB 29.00 billion | RMB 31.87 billion | 100.0% | - In 2023, the company achieved a net income of RMB 1.95 billion, a significant turnaround from net losses in 2021 and 2022. This was driven by a 9.9% increase in total revenues and improved operating efficiency[499][521] - Membership services revenue grew 14.7% in 2023, driven by a 5.7% increase in monthly ARM to RMB 15.13 and a rise in the average daily number of total subscribing members to 111.9 million[522] - Online advertising revenue increased by 16.7% in 2023, primarily due to growth in the performance-based advertising business. Average brand advertising revenue per advertiser also rose by 13.7%[523] - Gross profit increased by 31.3% to RMB 8.77 billion in 2023, with the gross profit margin improving from 23.0% in 2022 to 27.5% in 2023[527] Liquidity and Capital Resources - As of December 31, 2023, the company had RMB 4.43 billion in cash and cash equivalents and RMB 0.94 billion in short-term investments. However, it reported a working capital deficit of RMB 9.7 billion[535] - The company generated positive net cash from operating activities of RMB 3.35 billion in 2023, a significant improvement from a net cash usage of RMB 70.6 million in 2022[551][552] - In 2022 and 2023, the company conducted several financing activities, including a private placement raising US$285 million, issuance of US$550 million in PAG Notes, a follow-on public offering raising US$500 million, and an offering of US$600 million in convertible senior notes due 2028[540] - The company believes its current cash, available credit lines, and anticipated cash flows from operations will be sufficient to meet its working capital and capital expenditure needs for at least the next 12 months[539] Research and Development, Patents and Licenses, etc. - The company utilizes AI technology across its entire business, including content creation, production, distribution, and monetization, to improve efficiency and user experience[576] R&D Expenditures (2021-2023) | Year | R&D Expenditure (RMB) | % of Total Revenues | | :--- | :--- | :--- | | 2021 | RMB 2.79 billion | 9.1% | | 2022 | RMB 1.90 billion | 6.5% | | 2023 | RMB 1.77 billion | 5.5% | - Advanced technologies are employed to enhance user experience, offering features like 4K/8K high-definition video, Dolby Atmos® audio, and AI-powered search functions like AI Radar[582] ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section details the company's leadership, executive and director compensation, share incentive plans, board practices, and employee count - The board of directors consists of eight members, chaired by Junjie He. Dr. Yu Gong is the founder, CEO, and a director[612][613][614] - For the fiscal year 2023, the aggregate cash compensation paid to executive officers and directors was RMB 35.5 million (US$5.0 million)[627] - The company has three share incentive plans: the 2010 Plan, the 2017 Plan (no outstanding awards), and the 2021 Plan, used to grant options and restricted share units to employees, directors, and consultants[632][641][643] - As of December 31, 2023, the company had 4,788 employees, a decrease from 4,981 in 2022 and 5,856 in 2021, reflecting an efficiency enhancement initiative[661] ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section details iQIYI's ownership structure, including Baidu's controlling stake, and key related party transactions and cooperation agreements - As of February 29, 2024, Baidu is the controlling shareholder, holding 45.4% of total ordinary shares and 89.2% of the total voting power[200][667] - PAG is a principal shareholder, beneficially owning 17.8% of Class A ordinary shares as of February 29, 2024[667] - The company has a master business cooperation agreement with Baidu for collaboration in AI technology, cloud services, online advertising, and internet traffic. Baidu agrees not to compete in long-form video, and iQIYI agrees not to compete in Baidu's core businesses[685][688] Key Transactions with Baidu (FY 2023) | Transaction Type | Amount (RMB) | | :--- | :--- | | Bandwidth and cloud services fees paid to Baidu | RMB 550.7 million | | Advertising services provided by Baidu | RMB 116.1 million | | Membership services revenue from Baidu | RMB 92.9 million | ITEM 8. FINANCIAL INFORMATION This section covers key financial disclosures, including ongoing securities class-action lawsuits, copyright infringement cases, and the company's dividend policy - Following a short-seller report in April 2020, the company is a defendant in several putative securities class-action lawsuits and has been requested by the SEC to produce documents. The outcome of these matters is uncertain[710][711] - As of December 31, 2023, iQIYI was a defendant in 168 pending cases in mainland China, primarily for alleged copyright infringement, with aggregate damages sought of approximately RMB 416.1 million (US$58.6 million)[713] - The company has no current plans to pay cash dividends and intends to retain future earnings to operate and expand its business[716] ITEM 10. ADDITIONAL INFORMATION This section details the company's corporate governance, dual-class share structure, differences in corporate law, and tax considerations including PFIC status - The company has a dual-class share structure: Class A ordinary shares have one vote per share, while Class B ordinary shares have ten votes per share. Class B shares are convertible into Class A shares, but not vice-versa[730][732] - As a Cayman Islands exempted company, iQIYI is not obligated by law to hold annual general meetings, and shareholder rights to inspect corporate records are more limited compared to U.S. corporations[742][746] - The company believes it was not a Passive Foreign Investment Company (PFIC) for the 2023 taxable year but notes that PFIC status is a fact-intensive determination made annually and cannot be guaranteed for future years[296][801] ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section details the company's exposure to market risks, primarily foreign exchange risk from USD-denominated notes and interest rate risk - The company's primary market risk is foreign exchange risk, as its revenues are mainly in RMB while it has significant U.S. dollar-denominated convertible senior notes outstanding (US$1.54 billion as of Dec 31, 2023)[818] - A hypothetical 10% appreciation of the U.S. dollar against the RMB would have increased the value of the company's U.S. dollar-denominated convertible senior notes by RMB 1.095 billion as of December 31, 2023[818] - The company has not entered into any material hedging transactions to mitigate its foreign currency exchange risk[821] PART II ITEM 15. CONTROLS AND PROCEDURES This section confirms the effectiveness of the company's disclosure controls and internal control over financial reporting, as concluded by management and the independent auditor - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[838] - Based on the criteria in the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2023[843] - The independent registered public accounting firm, Ernst & Young Hua Ming LLP, provided an unqualified attestation report on the effectiveness of the company's internal control over financial reporting as of December 31, 2023[844] ITEM 16. CORPORATE GOVERNANCE AND OTHER DISCLOSURES This section covers corporate governance, including the code of ethics, auditor fees, Nasdaq exemptions, and cybersecurity risk management - The board has adopted a code of ethics applicable to all directors, officers, and employees[847] Principal Accountant Fees (2022-2023) | Fee Type | 2022 (RMB) | 2023 (RMB) | | :--- | :--- | :--- | | Audit fees | RMB 16.07 million | RMB 17.16 million | | Audit-related fees | RMB 6.14 million | RMB 3.63 million | - As a foreign private issuer and a "controlled company" (controlled by Baidu), iQIYI follows certain home country practices and is exempt from some Nasdaq corporate governance requirements, such as having a majority-independent board and holding an annual shareholder meeting (none was held in 2023)[855][856][857] - The company has established a cybersecurity risk management framework overseen by the board of directors and a management-level cybersecurity committee. As of the report date, no material cybersecurity incidents have been identified[861][864][865] PART III ITEM 18. FINANCIAL STATEMENTS This section presents the company's audited consolidated financial statements prepared under U.S. GAAP, with the independent auditor's unqualified opinion - The independent registered public accounting firm, Ernst & Young Hua Ming LLP, issued an unqualified opinion on the consolidated financial statements for the three years ended December 31, 2023[888] - The firm also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023, based on the COSO 2013 framework[897] - A critical audit matter identified was the amortization of content assets, which required complex and subjective judgment regarding estimates of future viewership consumption patterns[892][893] ITEM 19. EXHIBITS This section lists all exhibits filed with the annual report, including corporate documents, securities agreements, share incentive plans, and key VIE and convertible note arrangements - The exhibits include the company's Ninth Amended and Restated Memorandum and Articles of Association[872] - Multiple exhibits detail the contractual arrangements with the company's VIEs, such as Share Pledge Agreements, Exclusive Purchase Option Agreements, and Shareholder Voting Rights Trust Agreements[872][873] - Indentures for various convertible senior notes (due 2023, 2025, 2026, 2028, and PAG Notes) are filed as exhibits[877][878]