iQiyi (NASDAQ: IQ) has had a wild ride since going public in March of last year. The stock ended its first day of trading at $15.50 before soaring as much as 193% by summer, as excitement for the "Netflix of China" grew. Slowing economic growth in China and a trade war with the U.S. took the wind out of iQiyi's sails in late 2018, causing the stock to fall below its IPO price early this year. Optimism about warming trade relations gave the stock new momentum -- it's bounced back over 50% from its January lows.
Better-than-expected results and a strong forecast from iQiyi sent the "IQ" symbol soaring nearly 22% on Friday in the wake of the company's solid fourth-quarter 2018 earnings report. Let's look at a few of the factors that gave investors renewed enthusiasm for iQiyi's future.
iQiyi's Story of Yanxi Palace was one of several hits last year that attracted hordes of new members. Image source: iQiyi.
1. Revenue up 55%
iQiyi continues to exhibit impressive growth. The company produced revenue of 7 billion yuan ($1.0 billion), an increase of 55% year over year. This easily exceeded management's guidance for revenue of 6.48 billion yuan ($943.5 million at the time of the forecast) and analysts' consensus estimates of $972 million.
The top-line beat was driven by a strong showing across each of the company's key operating segments. Membership-services revenue soared 76% year over year, and advertising revenue grew 9% compared to the prior-year quarter. Similar to Hulu, iQiyi has both ad-supported and paid subscriptions for its growing member base.
Revenue from content distribution showed the most robust growth, expanding 137% year over year to 522 million yuan ($75.9 million) on the strength of the company's premium-content titles. The "other" revenue segment, which includes iQiyi's ancillary businesses such as content merchandising and online games based on its original programs, topped 2.9 billion yuan ($418 million), up 107% year over year.
2. Member growth is soaring
iQiyi reported that its subscriber numbers grew to 87.4 million during the quarter, up 72% year over year, and that 98.5% of subscribers are paying members, while the remainder are on free trials. On the company's earnings conference call, Yu Gong, iQiyi's Founder, Director, and CEO, attributed the impressive growth to iQiyi's premium content that he said was "clearly driving subscribers' conversion and stickiness."
Premium content has been a strong draw for iQiyi, and a number of the company's hit shows have created considerable buzz across China. A single example helps illustrate iQiyi's success. Last year's street dance competition series Hot-Blood Dance Crew attracted more than 1.8 billion views and generated 650 million yuan ($95 million), breaking records for online ad revenue, the number of sponsors, and quickest ad sellout for an online variety show.
3. Strategic partnerships are fueling growth
Other factors that contributed to the strong subscriber additions were iQiyi's strategic partnerships with some of China's most well-known companies. Last year, the company inked a deal with e-commerce provider JD.com that offers the premium benefits from both platforms to the subscribers of either for a period of one year.
iQiyi original program Hot Blood Dance Crew was a smash hit. Image source: iQiyi.
Gong said the streaming provider also deepened its relationship with China Mobil, introducing combined memberships and mobile video data packages that include the state-owned company's video-streaming service MIGU. The app provides a wide variety of digital content aimed at Chinese teens, including anime, comics, video games, and music. The platform is home to more than 17 million songs, 4.3 million videos, 1,200-plus live-streaming events, 30,000 games, and 470,000 anime titles.
The company expanded its relationship with online travel company Ctrip, which enables iQiyi premium members to use a number of priority travel services. These include access to VIP airport lounges and priority access to discounted hotel bookings, vehicle reservations, the purchasing of train tickets, and free entry to a number of sightseeing attractions. Additionally, Ctrip Prime members benefit from an eight-month VIP membership with iQiyi.
Each of these partnerships facilitates the cross-selling of services, helping to fuel iQiyi's growing subscriber numbers.
4. The future will be streamed
Streaming-video services continue to gain momentum across the globe, and iQiyi is well-positioned to capture its share of that growth in China. iQiyi is forecasting total revenue in a range of 6.80 billion yuan ($989.6 billion) and 7.10 billion yuan ($1.0 billion), which would represent growth of between 40% and 46% in its seasonally slower first quarter. This projection topped analyst expectations for revenue of about $976 million.
It's important to remember that iQiyi is following the Netflix model and spending heavily to secure content for its growing base of subscribers. This resulted in losses that topped 3.5 billion yuan ($506 million) for the fourth quarter and 9.4 billion yuan ($1.4 billion) for the year. While that strategy has worked until now, there aren't any guarantees that it will continue.
iQiyi continues to execute well on its strategy, giving investors a reason to celebrate its strong earnings report.
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