iQIYI - Q1 2024
May 16, 2024
Transcript
Operator (participant)
Thank you for standing by, and welcome to the iQIYI 1Q 2024 earnings conference call. All participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key, followed by the number one on your telephone keypad. I would now like to hand the conference over to Ms. Chang Yu, IR Director of the company. Please go ahead.
Chang Yu (Head of Investor Relations)
Thank you, operator. Hello, everyone, and thank you for joining iQIYI's 1Q 2024 earnings conference call. The company's results were released earlier today and available on the company's investor relations website at ir.iqiyi.com. On the call today are Mr. Yu Gong, our founder, director, and CEO; Mr. Jun Wang, our CFO; Mr. Xiaohui Wang, our CCO, Chief Content Officer; Mr. Wenfeng Liu, our CTO, Chief Technology Officer; Mr. Youqiao Duan, Senior Vice President of our Membership Business; Mr. Xianghua Yang, Senior Vice President of Movies and Overseas Business; and Mr. Gang Wu, Senior Vice President of Brand Advertising Business. Mr. Gong will give a brief overview of the company's business operations and the highlights, followed by Jun, who will go through the financials. After the pre-prepared remarks, the management team will participate in the Q&A session.
Before we proceed, please note that the discussion today will contain forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC. iQIYI does not undertake any obligation to update any forward-looking statement, except as required under applicable law. I will now pass the floor to Mr. Gong. Please go ahead.
Yu Gong (CEO)
Hello, everyone. Thank you for joining us today. We kick off the year with a strong 1Q as we continue to execute our high quality growth strategy and achieve multiple historical highs in key financials and operational results. The non-GAAP operating income and its corresponding margin both reached a record high, with income of RMB 1.1 billion and margin of 14%. The expanding margin is a natural result of high quality growth. For our membership services business, the monthly ARM grew to an all-time high, which marked the sixth consecutive quarter of sequential growth. We are satisfied with the progress and continue to believe that ARM remains one of the key drivers for unleashing the long-term value of membership services. In our advertising services, revenue from performance ads has achieved double-digit annual growth and hit historical high in Q1.
We anticipated the momentum to continue as it directly benefited from the growing adoption of generative AI, which is expected yield greater returns on investment for advertisers. Content distribution revenue hit historical high as well, reached RMB 928 million, and grew 27% annually. This clearly illustrates that our growing content production capabilities are creating more high quality content that is recognized by television stations and other buyers. While we delivered impressive financial performance in the quarter, we maintained our dominance in content. The data from Enlightent shows that our total viewership share across major content categories, such as dramas and movies, maintained the top spot in the market in Q1. Notably, in the crucial drama category, we have held the number one position for viewership share for 9 straight quarters.
Aside from our domestic achievements, we are also excited by the amplified reach and the influence of our content and brand in the overseas markets. Now, let's dive deeper into the performance of core business segments. Starting with membership services, we are committed to offering our users superior content, the finest user experience, and enhance the member privilege and the benefits, which we believe will fuel the sustainable long-term growth of our membership services revenue. Our focus extends beyond merely the quarterly subscriber numbers, as a revenue result, ultimately reflects all the collective components contributing to that performance. With that said, we believe the way we share the development of our membership business should be online as well. Starting in Q1 of this year, we will start reporting the quarterly average subscriber numbers and ARM.
We will provide updates on key milestones related to subscriber growth and ARM as they are achieved. In the 1Q, we delivered membership revenue of RMB 4.8 billion, flat sequentially, and down 13% from a year earlier. The year-over-year fluctuation was primarily due to the high base effects created last year with the release of our mega hit, The Knockout. The surge in travel and offline entertainment during the very first Chinese New Year holiday of this year, post-COVID, also partially dilute the online activities. Currently, among the various factors contributing to the revenue performance, we are intentionally focusing on enhance the ARM and extending the lifespan of each membership, which serves as our principal areas of focus. We remain highly confident in the long-term growth potential of our membership business.
Our confidence is supported by the success of our ARM strategy, which reflects six consecutive quarters of sequential growth. The strong performance is driven by our ongoing efforts to improve operations, enrich product offerings, and enhance membership benefits, all of which have bolstered the value proposition of our members. Given that our membership fees are affordable and the effective ARM remains modest, we have the opportunity to further refine our pricing strategy, emphasizing the exceptional value of our premium content and services. We have been working on improving ARM by introducing exciting services that add substantial value. Take the express package, for example. Cash purchase for the drama, A Lonely Warrior, reached a new high. The express package not only brought in more revenue, but it also increased the popularity of the title.
In fact, just one day after we launched this package, the drama hit its peak on the iQIYI popularity index score. We are making good progress in bringing additional value to our members, while concurrently driving revenue and popularity. In summary, our strategy for our membership business involves consistently delivering premium content and streaming, streamlining operations, and making efforts to attract and engage users. We also intend to adapt our membership offering to suit diverse user preference and bolster our loyalty program to motivate commitment to long-term premium subscriptions. Such initiatives are designed to foster loyalty and enhance customer lifetime value. Moving on to content. Maintain market leadership in key content genres as we enforce our reputation as a diversified and high-quality premium content powerhouse. For nine consecutive quarters, our drama viewership shares have topped the industry.
The quarter's newly released titles highlighted the extensive range and depth of our offering. We achieved meaningful advancements in the realistic genres, distinguishing ourselves from competitors with strong quality dramas infused with varied creative elements. This strategy has successfully broadened our content creation expertise. Original programming remains the cornerstone of our content strategy. iQIYI originals accounted for over 70% of our key new dramas launched in the 1Q, covering diversified scenes. In particular, War of Faith emerged as the first drama in this year, and the thirteenth in history, to surpass an iQIYI popularity index score of 10,000, setting it apart from other War of Faith shows. War of Faith, a historical period setting with financial intrigue, suspense, and other creative elements, demonstrates our commitment to innovation as we continue to push general boundaries and introduce unique storytelling perspectives.
The well-received drama, Always on the Move,[Foreign Language], which was released during the Chinese New Year holiday, recorded a viewership share of over 27% at its peak, according to Enlightent. It also set a new record for drama viewership on CCTV Eight, and its iQIYI popularity index score was 9,959, just shy of 10,000 landmark. After establishing our industry leadership in suspense genre with Light On Theatre, we have continued to thrive in the comedy genre, introducing three new titles under the Laugh On Theatre brand this quarter. This includes Parallel Universes,[Foreign Language], and The Great Nobody, [Foreign Language], both of which are drama spin-off of a spin-off of our hit variety show.
Additionally, the newly released A Soldier's Story [Foreign Language] has broken records for the highest popularity index score, highest revenue, and the best ROI for Love Unfiltered production. During the quarter, we also released a collection of diverse, high-quality dramas, such as Burning Flames[Foreign Language], Born to Run[Foreign Language], Detective Chinatown Two [Foreign Language]. For the quarter, our movie viewership outperformed competitors, as reported by Enlightent. We released 24 major films across genres like crime, suspense, and action, including top grossing theatrical releases on our movie channel. Meanwhile, 32 movies debuted on our Cloud Cinema channel to positive audience reception. We also observed encouraging early responses for our new Action Master season[Foreign Language] and Art Film Cinema [Foreign Language] brand releases.
For variety shows, we made solid progress in both new releases and established IPs. Become a Farmer[Foreign Language] Two, leverage the strong depths of the first season and achieved not only a notable boost in popularity and revenue, but also spurred a resurgence in viewership for the first season. In addition, Wu Ha Season 5 [Foreign Language], with a high level of interaction among guests, and interaction index surpassed 8,408 at peak. For animation, we've got better at what we do, and users responded well. Our original works, The Great Ruler[Foreign Language], and Against the Gods [Foreign Language], achieved the best performance for domestic animation on our platform.
Our upcoming dramas feature stand out titles such as Fox Spirit Matchmaker, [Foreign Language], Follow Your Heart, [Foreign Language], and As Husband, As Wife, [Foreign Language]. Our slate of recent releases, including In the Name of Brother, [Foreign Language], and others, have bolster our reputation for delivering high quality and diverse content with great audience appeal. Notably, City of the City, [Foreign Language], become the highest-rated show during prime time on CCTV One this year. In particular, To the Wonder, [Foreign Language], exemplify our success in blending artistic merit with commercial success.
The series, adapted from literary prose and spices up with light comedy elements, supports our pioneering active standard, and offers a cinematic experience that sets a new industry benchmark. Additionally, this series is the first to utilize our in-house developed cloud-based on-site production management system, enabling instant collaboration on daily shooting footage remotely and largely boosting production efficiency. To the Wonder has achieved a profitability, while other domestic and international acclaim. It tops the ratings on Douban this year, become the first eight-episode miniseries to air during CCTV One's prime time slot, and was the first Chinese drama to be selected for the prestigious long-form competition at Cannes Series.
The Light On Theatre is set to introduce six titles in 2022, with notable ones such as the already released Tell No One, Book of Godwin, and the upcoming Lost in the Shadow, Come Die in the Shadow, Interlaced Scenes, Jiao Cuo De Chang Jing. In addition, we are broadening our genre-focused theatre mode with two new brands. Microcosm Theatre, which focuses on premium mini-series that capture the nuances of everyday life, with To the Wonder being its first title. The Masterpiece Theatre, on the other hand, offering adaptations of esteemed literary works. We believe the tyhetrer mode will further enhance content performance and the commercial value. Our Q2 movie offerings include social relevance titles like Pegasus 2, and The Pig, The Snake, and The Pigeon, Zhou Chu Chu San Hai.
Cloud Cinema will showcase Yolo, a hit from the Chinese New Year release window, along with renowned director Zhang Yimou, Article Twenty, Di Er Shi Tiao, and the action package, Suspect, Chao Yi Sheng Han. Additionally, we are eager for the main seventeenth filter release of Hovering Blade, Pang Huang Zhi Ren, based on Keigo Higashino's Eastern Novel, Dongye Guiwu. With our variety show, we have seen a strong return on our established IP, including Detective Adventure Season Four and The Rap of China 2024. We are also exploring new IPs in the reality show genres with I Play Basketball in Hengdian and Wonderland, Shui Yuan Zhi Hou Hui Dao Xian Shi. Our original production capabilities for animation continue to improve. We expect the number of kids animation titles we release next quarter to increase.
In addition to sequels from existing materials, we will launch new IPs such as Fantastic Around, Xiao Xiao Bang Bang Bang. We also press forward with the sequels of new animation IPs like Phoenix Gardens, The Golden Kong Princess, Jing Wei Zhi Feng Huang Jing Ying, and I'm the Blade Master, Wu Ming Dao Zun, in the martial arts and the fantasy genres. We recognize that the core strength of the long form video industry lies on consistently delivering high quality content that strikes a balance between creative value and economic success. Our edge in this industry is secured by combining elite talent and industry resources, rigorous content evaluation and management, sophisticated business intelligence, and innovation technology.
As we progress through 2024, our approach will focus on crafting top-tier diverse content that leverage our leadership in general category. We are exploring advancement in the genres. We are also refine our release strategy to align with the evolving tastes of our audience. Moving on to the advertising business. In the 1Q, ad revenue reached RMB 1.5 billion, up 6% annually, which was driven mainly by the growth of performance ads. Performance ads are the highlight of the quarter. The record high revenue was propelled by the growing adoption of generative AI, which in turn improves ROI for advertisers. In fact, we have successfully integrated generative AI tools into our iQIYI advertising platform, allowing advertisers to promote and create advertising materials on their own.
These tools have been effectively reducing production costs while improving ad quality and boosting ROI. For gaming and short-term advertisers, ads created with generative AI tools have seen an increase in ROI by over 40%-50%. With the role of generative AI rapidly expanding, we are leveraging its broader potential to transform the world of advertising. On brand ad business side, our premium content continues to attract brand advertisers. With over half of the revenue stemming from content targeted ads. A great example to this trend is the drama Always on the Move, Nan Lai Bei Wang , which achieved exceptional ad sales and performance. Additionally, the variety show Become a Farmer, Zhong Di Ba, which debuted in 2023, has seen a notable 80% increase in revenue this year.
By industries, the food and beverage sector stood out with solid increases in ad spending, both annually and sequentially. The medical services and the communication sectors also registered substantial growth in ad revenue, exceeding 20% on both annual and sequential basis. Looking ahead, we expect to see a resurgence in brand ad spending as second quarter is a traditional high season for brand ad business, and we have a strong line up of variety shows. Although we remain cautiously optimistic regarding the brand advertisements market for this year, we anticipate domestic brands to show faster recovery than their international peers. Moving on to technology and products, our dedication to advancing technology innovation remains steadfast, as it plays a crucial role in driving the industrialization of content production, improving user experience, and boosting operational efficiency.
We look forward to the abundant alternatives that AI presents across our business. We have been witnessing the revolutionary impact that the rise of AI technology is having on the evolving entertainment ecosystem. Other than the performance ad discussed earlier, we also seen the substantial benefits from integrating generative AI into the process of content production and operations. Well, we are still at the initial stage of fully releasing the potential of generative AI. It has meaningfully enhanced the industrialization of content production, contributing to the content quality improvements and the cost savings. For example, we utilize our in-house developed data-driven platform, the IPS Content Production Management System, to meaningfully improve the hit ratio while enhancing content production and operation efficiency.
Our latest upgrades have extended its scope from dramas to include variety shows, animations, and movies, and it is continually refined to improve production and management capabilities. In addition, we have incorporated a broader range of AI tools into the system, streamlining everything from content selection to promotion. Our new AI features not only can summarize novels and scripts, but they also can assist in crafting story outlines and character profiles, increasing producers' reading efficiency by several points. Additionally, our system skillfully handles visual restoration for actors in post-production, which has been implemented in major projects. Beyond production, our marketing and distribution efforts have been upgraded as well.
We are now better equipped to produce compelling promotional materials, and our smart video search function offers more accurate content recommendations by effectively responding to plot-oriented searches and conversational commands. On the user product front, we take great prize, pride in our continuous commitment to improving the user experience. The introduction of Kids Mode on our smart TV app, designed to curate content suitable for children, has resulted in increased parental trust and user engagement time. Last but not least, for our business performance in regions outside of mainland China, we achieved solid annual revenue growth in the 1Q. Membership revenue grew both annually and sequentially, with nearly 80% annual increase in markets such as Hong Kong and the U.K. We continue to amplify the reach and the influence of our content and the brand in the overseas markets.
iQIYI Originals continued to gain traction among overseas audience. The overall viewership of Sword and Fairy 4, Xian Jian Qi Xia Zhuan, ranked first in all regions and categories on our overseas platform. Topped popularity charts in Thailand, Vietnam, and Indonesia. The second season of our Malaysian original, Rampas Cintaku 2, Xin Ta Ku 2, continued its success of the first season, boosted both traffic and membership annual growth on our Malaysian site. Leveraging our premium content, we developed local partnership to boost global penetration and monetization. We have strengthened ties with telecom companies and tourism authorities in Hong Kong and Thailand, and launched an iQIYI drama slot on selected local TV station in Thailand.
Looking ahead, we aim to provide a steady slate of premium C-pop content to key overseas market, and accelerate the production of original premium content for local audiences. Meanwhile, we will persist in our efforts to promote C-pop and local content, through partnership with Southeast Asian TV stations. As we enhance our brand presence in key markets, we are also committed to exploring a variety of IP monetization opportunities. In summary, the strong performance in the 1Q demonstrated the successful execution of our high-quality growth strategy. We recently celebrated our fourteenth anniversary. As we step boldly into the future, we are seeing more exciting opportunities ahead, especially when we assess the power of generative AI, which could potentially transform the entire landscape of entertainment.
With this in mind, we are committed to leveraging the pioneering technologies to further enhance our ability to continuously provide high quality content and extend our lead in the industry. Now, let me pass on to Jun Wang, our financial performance.
Jun Wang (CFO)
Thanks, Mr. Gong, and hello, everyone. We delivered a strong Q1 result with a record high operating profit and corresponding margins, improved cash flow, and a healthier balance sheet. We believe we can utilize more tools to enhance shareholder value over time. Now, let me walk you through the key numbers. In Q1, the total revenues were RMB 7.9 billion. Membership services revenue reached RMB 4.8 billion, remained stable sequentially, and decreased 13% annually. The annual decrease, as previously explained, was primarily due to the high base effect from the same period last year. For online advertising, revenue grew by 6% annually to RMB 1.5 billion. The increase was primarily driven by the growth of performance ad revenue, which achieved double-digit annual growth and hit a historical high in Q1, even compared with a high base from the last year.
The content distribution revenue also hit all-time high, reached RMB 928 million, and grew 27% annually. Moving on to costs and expenses. The content cost was RMB 4 billion, down 5% annually, driven by our improvement in content strategy and operating efficiency. Total operating expenses was RMB 1.4 billion, down 12% annually, primarily due to our discipline in the marketing spending and the reversal of allowance for credit losses. Turning to profits and cash flows, our non-GAAP operating income was RMB 1.1 billion, and its corresponding margin is 14%, reaching historical high. Furthermore, the operating cash flow totaled RMB 938 million, remaining positive for eight consecutive quarters, reflecting the continuous improvement of our balance sheet.
At the end of Q1, we had cash, cash equivalent, short-term investments, and long-term restricted cash, including the prepayment and other assets of RMB 7.3 billion in total.
Moving forward, we will remain committed to creating long-term value for our stakeholders. We aim to continue to generate sustainable profit and cash flow and to further strengthen our balance sheet. For detailed financial data, please refer to our press release on our IR website. With that, I will now open the floor for Q&A.
Operator (participant)
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Please ask your question first in Chinese, then again in English. In the interest of time, we ask that you please ask one question at a time. You may press star one again to rejoin the queue if you wish to ask a follow-up question. Your first question comes from Huiqing Zhong from CICC. Please go ahead.
Huiqing Zhong (Managing Director)
[Foreign Language]
Thank you, Yu Gong and management for taking my question. Congratulations on the strong results. My question is about the membership business. The company did not disclose subscriber numbers this quarter. What's the reason for that? Then, how do we view the long-term development of the membership business going forward? Thank you.
How should we think about the outlook for the membership business in the longer term? Thank you.
Jun Wang (CFO)
[Foreign Language]
Speaker 12
The CEO, Mr. Gong, just explained why we didn't disclose the sub numbers and RPM, because this only partially indicates the progress of our entire business. So, disclosing the numbers too much in details probably will disturb some of the development of our overall business. So for the details, we'll invite Mr. Duan, who's in charge of the membership business, to explain further.
Youqiao Duan (SVP of Membership Business)
[Foreign Language]
Speaker 12
After serious consideration, we decided no longer to disclose the subscriber and ARM data starting this quarter. At the same time, we believe many of you have already noticed that there is an overseas streaming platform which will soon cease the disclosure of these data as well.
Youqiao Duan (SVP of Membership Business)
[Foreign Language]
Speaker 12
Our reasoning is in part similar due to the different rights and pricing associated with various membership products and tiers. Each user contributes a different economic value and therefore to merely reflect business and financial progress through the number of subscribers at a specific point in time or over a period is actually incomplete and lacks objectivity.
Youqiao Duan (SVP of Membership Business)
[Foreign Language]
Speaker 12
Since the beginning of 2022, we have always emphasized that the core goal of our membership business is to maximize long-term membership revenue. In the current stage of development of our membership business, the indicators for evaluating its growth and health are now limited to the performance of subscriber count. Therefore, the three drivers to revenue growth, namely ARM, membership lifetime and subscriber scale, will ultimately be reflected in the revenue performance. Overall, we believe using membership revenue as the core indicator is the best way to help investors understand the business progress.
Youqiao Duan (SVP of Membership Business)
[Foreign Language]
Speaker 12
In terms of the content performance, aside from revenue, actually there are other external real-time indicators that can help investors understand our business performance. For example, and not, including iQIYI's popularity index and third-party data.
Youqiao Duan (SVP of Membership Business)
[Foreign Language]
Speaker 12
We remain confident in the long-term growth prospects of our membership business. In the future, we will continue to drive the long-term healthy growth of our membership business through measures such as, improving content quality and diversity, more optimized membership products and services, and also better penetrate both user groups that are not fully served, for example, the elderly and the youth. Thank you.
Youqiao Duan (SVP of Membership Business)
[Foreign Language]
Speaker 12
And last but not least, I wanted to remind everyone that, for each company, actually, the way we track subscriber number is, or the disclosure measures are a little bit different also. Thank you.
Operator (participant)
Thank you. Your next question comes from Maggie Ye from CLSA. Please go ahead.
Maggie Ye (Head of Investor Relations)
[Foreign Language]
I'll translate myself. My question is related to our recently released iQIYI Original premium mini-series, To the Wonder, which is very well rated on Douban, currently with 8.8 score, and myself is a big fan of it. So I noticed that this drama series represents very outstanding artistic qualities and is very different from traditional commercial productions. I'm just wondering, what's the investment return look like for this type of, similar projects? And, is this indicative of the new direction for iQIYI's future content strategy? Thank you.
Chang Yu (Head of Investor Relations)
Thank you, Maggie. We'll invite, our CCO, Chief Content Officer, Mr. Xiaohui, to answer this question.
Xiaohui Wang (Chief Content Officer)
[Foreign Language]
Speaker 12
To the Wonder actually has been a very much resounding success. We think it cannot be simply categorized as art drama or commercial drama, rather, it also represents a new direction of our innovation and actually fully affirming our belief in emphasizing both content quality and commercial success. Indeed, it received the highest rating on Douban this year for domestic drama series, scoring as high as 8.8. And it also represented Chinese language series internationally for the very first time at the Cannes Series, setting a very good excellent start for iQIYI's new microcosm theater.
Xiaohui Wang (Chief Content Officer)
[Foreign Language]
Speaker 12
In terms of content innovation, we adapted the story from a literary prose and spiced up with light comedy elements. Actually, this brings a new energy and rhythm to the drama with, for a relatively strong literary quality.
Xiaohui Wang (Chief Content Officer)
[Foreign Language]
Speaker 12
What's more impressive, actually, is that, from a commercial perspective, this drama actually achieved profitability through diverse revenue streams, proving that the high quality content yields not only strong social influence, but also substantial commercial potential.
Xiaohui Wang (Chief Content Officer)
[Foreign Language]
Speaker 12
Coming back to our content strategy, we will continue to balance content quality with commercial value, consistently producing high quality, diverse, and commercially valuable content. We aim to solidify our core competitive advantage in the drama sector, while seeking more breakthroughs in other content genres.
Xiaohui Wang (Chief Content Officer)
[Foreign Language]
Speaker 12
Regarding our drama strategy, we will continue to consolidate our advantages in the realistic genre and strengthen our reserve of high quality ancient costume dramas. We are committed to cultivating high quality, diverse content with the aim of gaining the broadest possible recognition from our audience.
Yu Gong (CEO)
[Foreign Language]
Speaker 12
Our CEO, Mr. Gong, just added, actually, for our content strategies, how cost control is very, very important, and just namely To the Wonder actually had a very good cost control. So that's why our commercial aspect, it performed very well in this. Thank you.
Operator (participant)
Thank you. Your next question comes from Thomas Chong from Jefferies. Please go ahead.
Thomas Chong (Regional Head of Internet & Media)
[Foreign Language]
Thanks management for taking my question. My question is about online advertising. Can management comments about the advertising outlook in 2024, in particular performance based advertising? On the other hand, can management also comment about how AI benefit our advertising business? Thank you.
Chang Yu (Head of Investor Relations)
Oh, thank you, Thomas. We will invite our CTO, Wenfeng Liu, to answer this question related to a performance ad.
Wenfeng Liu (CTO)
[Foreign Language]
Speaker 12
Performance ad has indeed achieved considerable growth in the 1Q. Actually in the 1Q, the ad revenue reached an all-time high, contributing to over 40% of the total advertising revenue. We expect to continue to see strong annual revenue growth in Q2 and also throughout this year. And also we found that the application of Generative AI has effectively driven the growth of our performance ad business. Compared to brand advertising, the impact of Generative AI on performance ad actually is more significant, and still holds tremendous potential to drive future ad revenue growth for us, and this is actually reflected in a few several aspects.
Wenfeng Liu (CTO)
[Foreign Language]
Speaker 12
Wenfeng actually mentioned the three aspects. First, in terms of ad material production efficiency, advertisers can use this AI tool to independently and automatically generate a wide range of image and video ad materials, increasing production efficiency and lowering costs for advertisers. And second, regarding the quality of ad material production, generative AI helps industries to create high quality materials that coincide with the high quality video content on our platform, making ads more native and resulting in better campaign performance. And third, in ad placement, by relying on upgraded model architecture and evolving ad placement strategies, we can optimize ad performance to make ad placement more precise and personalized, helping advertisers achieve better results while enhancing the monetization efficiency of user traffic.
Wenfeng Liu (CTO)
[Foreign Language]
Speaker 12
Moving forward, we will continue to leverage generative AI capabilities to help advertisers to attract high-quality users, achieve platform and delivery synergy, and also reinforce the value of exposure and enhance the advertising effectiveness. Looking at the performance, by industries for Q2, we are optimistic about the development of sectors, including e-commerce, online services, gaming industry, and the fast-growing sectors such as short dramas, which are, we believe, will bring more opportunities for performance ads. Thank you.We will invite Mr. Gang Wu, who is the Senior Vice President of Brand Ad Business, to add on the performance for the brand ad.
Gang Wu (SVP of Brand Advertising Business)
[Foreign Language]
Speaker 12
Okay. For Q2, Q2 actually is the peak season for brand advertising. And with the enhanced of supply of variety shows in the quarter, we anticipate a recovery in brand advertising, both quarterly and annually. And for this full year's outlook, we remain cautiously optimistic attitude towards the brand advertising business for the entire year. And looking at the inter-industry's perspective, we are bullish on the food and beverage, medical services, and telecommunication industries. In general, we believe the future growth in brand advertising will still rely on the development of domestic brand advertisers.
Gang Wu (SVP of Brand Advertising Business)
[Foreign Language]
Speaker 12
We think the rapid increase in smart TV penetration rate will bring more opportunities to the advertising, the brand advertising business, helping advertisers to deeply engage with the highly commercial, commercially valuable home scenarios. Currently, actually, we have industry-leading user coverage on the large screen. Thank you.
Operator (participant)
Thank you. Your next question comes from Lincoln Kong from Goldman Sachs. Please go ahead.
Lincoln Kong (Executive Director and Senior Equity Analyst)
[Foreign Language]
So thank you, management, for taking my question. So my question is pretty straightforward to ask about our future strategy, especially what are the areas the management are focusing on for this year and for a longer term?
Yu Gong (CEO)
Thank you. [Foreign Language]
Speaker 12
Our CEO, Mr. Gong, is answering this question. So in the short term, actually, we will continue to improve our business operational efficiency to enhance team capabilities and including strengthening the business fundamentals, and also for the financial perspective, to improve the profits and cash flows.
Yu Gong (CEO)
[Foreign Language]
Speaker 12
So from the mid to long-term perspective, the very first one is to consistently enhance the quality and diversity and supply of stability of our premium content.
Yu Gong (CEO)
[Foreign Language]
Speaker 12
Second, for generative AI, we'll apply more broadly and more deeply into content creation and operations to raise our efficiency.
Yu Gong (CEO)
[Foreign Language]
Speaker 12
Third is to utilize all means to fight piracy.
Yu Gong (CEO)
[Foreign Language]
Speaker 12
The fourth one is to improve the quality of our domestic market operations. In terms of overseas business, we'll invest, I, I will say carefully, and then to properly invest into those markets.
Yu Gong (CEO)
[Foreign Language]
Speaker 12
In terms of future growth, and actually beyond our relatively mature businesses, for example, the membership business and also the advertising business, we will utilize the Generative AI and virtual reality, these innovative technologies, to explain to new business opportunities such as franchise, that including also both online and offline.
Yu Gong (CEO)
[Foreign Language]
Speaker 12
In the future, we will also both better serve two demographics. For example, the elderly and the children, by adapting product designs and content production to meet their needs. Also, to enhance their viewing experiences and very niche content preferences. For example, you know, for elderly to increase their accessibility to content viewing and also for kids content to provide them more healthy, safe, and reliable content.
Lincoln Kong (Executive Director and Senior Equity Analyst)
Thank you.
Speaker 12
Thank you.
Operator (participant)
Thank you. There are no further questions at this time. I'll now hand back to management for closing remarks.
Chang Yu (Head of Investor Relations)
Thank you, everyone, for joining the call today, and then if you have any questions, feel free to reach out to the IR team. Thank you.
Yu Gong (CEO)
Thank you. Bye-bye.
Chang Yu (Head of Investor Relations)
Thank you.
Operator (participant)
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.