IQIYI (IQ) Q2 Loss Narrower Than Expected, Revenues Rise Y/Y

iQIYI (NASDAQ:IQ) reported second-quarter 2019 adjusted loss of 49 cents per ADS. The loss was narrower than the Zacks Consensus Estimate of a loss of 52 cents.

In domestic currency, the company reported loss of RMB3.22 per ADS.

Revenues increased 15% from the year-ago quarter to RMB7.11 billion ($1 billion).

As of Jun 30, 2019, total subscribers increased 57.9% year over year and hit a milestone of 100.5 million. Of this 98.9% were paid subscribers. The number of total subscribers was higher than 67.1 million as of Jun 30, 2018.

The growth was primarily driven by increase in willingness of Chinese consumers to pay for high-quality content.

Top-Line Details

Membership revenues surged 38% year over year to RMB3.4 billion ($497.1 million), driven by strong subscriber growth, premium content and operational initiatives taken by iQIYI.

Online advertising services revenues were RMB2.2 billion ($320.6 million), down 16% from the year-ago quarter. Revenues declined due to unfavorable “macroeconomic environment in China and slower-than-expected recovery of in-feed advertising.”

Content distribution revenues decreased 4% to RMB517.9 million ($75.4 million) due to deferred content launches during the quarter.

Other revenues were RMB979.2 million ($142.6 million), up 82%, 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.

Operating Details

In second-quarter 2019, cost of revenues increased 14% year over year to RMB7.0 billion ($1 billion). The increase was primarily attributed to higher content costs and other cost items. Notably, content costs increased 7% to RMB5 billion ($731.9 million).

Selling, general and administrative expenses surged 42% year over year to RMB1.3 billion ($196.1 million), primarily due to increase in marketing spending and share-based compensation expenses.

Research and development expenses were RMB654.6 million ($95.4 million), up 48% primarily due to higher personnel-related compensation expenses.

Operating loss was RMB1.9 billion ($272.6 million), wider than operating loss of RMB1.3 billion million in the year-ago quarter.

Balance Sheet

As of Jun 30, 2019, cash and cash equivalents, restricted cash and short-term investments were RMB16.4 billion ($2.4 billion) compared with RMB17.9 billion ($2.7 billion) as of Mar 31, 2019.

Guidance for Q3

iQIYI expects total revenues between RMB7.21 billion ($1.03 billion) and RMB7.63 billion ($1.09 billion). The top line is expected to grow 4-10% year over year.

Zacks Rank & Stocks to Consider

iQIYI currently has a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader consumer discretionary sector include Crocs Inc. (NASDAQ:CROX) , Delta Apparel (NYSE:DLA) and Weight Watchers International (NASDAQ:WW) . All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for all the three stocks is pegged at 15%.

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