In the early hours of February 28, iQIYI, a Chinese online video streaming platform similar to Netflix, submitted a prospectus to the U.S. Securities and Exchange Commission (SEC). It is the first Chinese video site to land in the U.S. market after Youku, one of China’s biggest video sites, unlisted from the New York Stock Exchange.
iQIYI plans list on Nasdaq under the symbol “IQ” and is seeking to raise up to $1.5 billion. Specific valuation and price per share are not yet disclosed. Goldman Sachs (Asia), Credit Suisse Bank, Bank of America Merrill Lynch, Huaxing Capital, Citigroup and UBS Bank are its underwriters.
According to the prospectus, as of December 31, 2017, iQIYI has 50.8 million subscribers. Its daily and monthly active mobile users are 126 million and 421.3 million, respectively. Its daily and monthly active PC users are 53.7 million and 424.1 million, respectively. Users spend an average of 1.7 hours per day on iQIYI.
Online video companies Ku6 and Youku raised $70.52 million and $200 million during their respective IPOs. iQIYI’s IPO will set a record high for China’s network video platforms.
iQIYI was founded in April 2010 as QiYi, adopting its current name in November 2011. Between April 2010 and September 2014, iQIYI received multiple rounds of funding from Chinese internet search provider Baidu. According to the prospectus, Baidu is iQIYI’s largest shareholder with nearly 69.6 percent of iQIYI equity. Gong Yu, iQIYI founder and CEO, holds just 1.8 percent of its equity.
Xiaomi executives hold 8.6 percent of iQIYI equity. In November 2014, Xiaomi and Shunwei Capital invested $300 million (1.8 billion yuan) in iQIYI.
Baidu also invested more in iQIYI at the time.
In February 2017, iQIYI issued $1.53 billion in convertible bonds to investors including Baidu, Hill House Capital, IDG, Sequoia Capital, Boyu Capital, Everbright-IDG and Runliangtai Fund. The bonds have since been converted into iQIYI equity.
Baidu CEO Robin Li, Baidu President and COO Lu Qi and Xiaomi Co-Founder and Xiaomi TV Director Wang Chuan are iQIYI board members.
According to the prospectus, iQIYI’s total revenue in 2017 was $2.671 billion (17.3784 billion yuan), up 54.6 percent from its 2016 revenue of $1.772 billion (11.2374 billion yuan). iQIYI’s earnings in 2015 totaled $838.8 million (5.3186 billion yuan).
Although iQIYI remains unprofitable, its negative profit margins have been trending towards zero. iQIYI’s net losses in 2015, 2016 and 2017 were $406.1 million (2.575 billion yuan), $484.8 million (3.074 billion yuan) and $589.4 million (3.7369 billion yuan), respectively. The profit margins in those three years were -48 percent, -27 percent and -22 percent, respectively.
iQIYI’s diminishing negative profit margins indicate that while struggling for rapid revenue growth, iQIYI is effectively controlling for loss.
Baidu CEO Robin Li commented on iQIYI’s losses in a conference call. He said that iQIYI is still the market leader, ranking first in number of active users, average viewing time, number of paid subscribers and sales.
“Although iQIYI has not made profits, we lose less money than competitors,” said Li. Although the accuracy of this statement remains to be verified, losses are indeed the reality of the video industry. iQIYI’s main rival Alibaba Entertainment lost $603.7 million (3.828 billion yuan) in Q4 2017. Alibaba Entertainment includes Youku, Tudou, UC and Alibaba Film. Youku bore the bulk of the total loss.
Membership and advertising revenue continue to grow, and copyright licensing is the main cost.
According to the prospectus, iQIYI’s revenue from membership services in 2017 was $1.031 billion (6.536 billion yuan), up 73.7 percent from $593.4 million (3.7622 billion yuan) in 2016. In 2015, iQIYI’s revenue from membership services was only $157.3 million (997 million yuan).
In 2015, membership revenue accounted for 18.7 percent of total revenue. The ratio was up to 33.5 percent in 2016, and further increased to 37.6 percent in 2017.
Another major source of income for iQIYI is advertising revenue. iQIYI’s online advertising revenue in 2015 was $536.4 million (3.3999 billion yuan), and increased 66.2 percent up to $891.2 million (5.6504 billion yuan) in 2016. Ad revenue increased again by 44.4 percent to $1.287 billion (8.1589 billion yuan) in 2017.
iQIYI’s revenue in Q4 2017 was $759.7 million (4.817 billion yuan), up 53 percent year-over-year from $497.6 million (3.155 billion yuan). Q4 2017 membership income was $304.2 million (1.929 billion yuan), accounting for 40.1 percent of the total income.
In Q4 2017, iQIYI’s net loss was $96.2 million (610 million yuan), up by 35 percent from Q4 2016 when it suffered a $149.4 million (947 million yuan) loss.
Copyright licensing and original productions accounted for the bulk of the costs. In October 2017, iQIYI CEO Wang Xiaohui said iQIYI would spend over $1.58 billion (10 billion yuan) in copyright license agreements and original productions in 2018. Its projected $1.53 billion IPO would be just about enough to cover these expenses.
According to the prospectus, as of December 31, 2017, the iQIYI library contains more than 70,000 episodes of online dramas, variety shows, movies, children’s programs, documentaries, cartoons, sporting events and others, covering more than 30 content categories.
In 2018, iQIYI will also launch several original self-commissioned variety shows, such as Hot-Blooded Dance Crew and Clash Bots.
While original content can become hit shows, they may also be an ‘Achilles heel’.
Yuzui, a crime and investigation drama, was banned for a period of time. In February 2018, iQIYI hit network drama River God was also suddenly banned due to policy violation. iQIYI variety show The Rap of China was also banned as hip-hop culture contained vulgar language and unhealthy information. It remains unknown whether Hot-Blooded Dance Crew will become a hit or not.
If iQIYI original content becomes banned by authorities, all their investment may be wasted. Yearly content is planned and put into production far in advance. Even if iQIYI is able to readjust its content on the fly, it will face competitive pressures within the market.
As iQIYI submits its prospectus for the IPO, its valuation increased from $5 billion to $10 billion, and its funding scale from $1 billion to $1.5 billion. Baidu, Gong Yu and the founding team are at a vantage point.
The specific valuation and price per share are not disclosed. Goldman Sachs (Asia), Credit Suisse Bank, BofA Merrill Lynch, Huaxing Capital, Citigroup and UBS Bank are underwriters.