Q2 2023 iQIYI Inc Earnings Call
Participants
Chang Yu; IR Director; iQIYI, Inc.
Gang Wu
Jun Wang; CFO; iQIYI, Inc.
Tim Gong Yu; Founder, CEO & Director; iQIYI, Inc.
Unidentified Company Representative
Wenfeng Liu; CTO; iQIYI, Inc.
Xiaohui Wang; Chief Content Officer; iQIYI, Inc.
Youqiao Duan; SVP of Intelligent Device Business; iQIYI, Inc.
Alicia Yap; MD & Head of Pan-Asia Internet Research; Citigroup Inc., Research Division
Lei Zhang; VP in Equity Research & Research Analyst; BofA Securities, Research Division
Lincoln Kong; Equity Analyst; Goldman Sachs Group, Inc., Research Division
Unidentified Analyst
Xueqing Zhang; Analyst; China International Capital Corporation Limited, Research Division
Presentation
Operator
Thank you for standing by, and welcome to the iQIYI Second Quarter 2023 Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to Ms. Chang Yu, IR Director of the company. Please go ahead.
Chang Yu
Thank you, operator. Hello, everyone, and thank you for joining iQIYI Second Quarter 2023 Earnings Conference Call. The company's results were released earlier today and are 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; 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 highlights followed by Jun, who will go through the financials. After the 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 statements, except as required under applicable law. I will now pass on the floor to Mr. Gong. Please go ahead.
Tim Gong Yu
Hello, everyone. Thank you for joining us today. our focus of the quarter remained firmly on generating high-quality growth. Our original content strategy continues to deliver top-notch titles which in turn brought the strongest second quarter performance in our history in terms of key metrics, such as total revenues, profits, free cash flow and average daily subscribers during the quarter.
Also, we maintain our industry-leading position across various key aspects. The exceptional quarterly results clearly demonstrates the resilience and immense long-term growth potential of our business.
Now let me walk you soon to key developments in the second quarter. Firstly, we maintain our industry-leading position in drama market share for 6 consecutive quarters according to Enlightent. Our original dramas continue to play major role in terms of content supply and the revenue contribution. Notably Destined (inaudible) broke iQIYI's popularity index record by exceeding the 10,000 score in the shortest time. In addition, titles such as Thirteen Years of Dust and The Ingenious One generated highly positive word-of-mouth reviews, really enforcing our brand image diversify on the high-quality premium content powerhouse.
Second, on our financial perspective, we had the best second quarter revenue performance in our history, up 17% year-over-year. We recorded double-digit annual revenue growth across all key business lines, membership services revenue grew 15% annually and advertising revenue grew 25% annually. Meanwhile, non-GAAP operating income hit RMB 786 million, grew by 129% annually, marking the sixth consecutive quarter of profitability. Furthermore, our ability to generate cash further strengthened with free cash flow reaching RMB 872 million, positive for our consecutive quarters.
Our performance in the second quarter represents another solid step in our pursuit of high-quality growth. As we previously mentioned, iQIYI and the entire industry have been completely transformed. With rationalized competition, we have seen improving return on investment for the entire streaming industry. And as an industry leader, iQIYI largely enhanced original content ability to financial performance set a new market standard that drives the overall industry advancement. In light of this, we aim to the enhance the long-term health of our company production and operations, so that we can consistently outperform the industry.
Now let's dive deeper into the performance of our core business segment, starting with membership services. During the quarter, both membership revenue and the number of subscribers hit all-time high for a second quarter. Membership revenue decreased RMB 4.9 billion, up 15% year-over-year. Look at the key drivers behind. Monthly ARM for the quarter reached RMB 14.82, increasing both annually and sequentially. This was driven by our refined operating strategy.
For example, we optimized our pricing strategy, which effectively narrowed the gap between listing and actual rates. Average daily number of total subscribers in Q2 reached 111.2 million, up 13% year-over-year, primarily driven by our stable supply of content that continues to attract and retain members.
Our subscriber base declined on sequential business primarily due to, one, the impact of seasonality; and two, the high base effect after the release of The Knockout and the natural attrition of members. Despite that, we are encouraged by the continuous optimization of membership structure. The absolute number and proportion of annual subscribers both had meaningful growth year-over-year. I would like to reiterate that the goal of our membership business is to maximize user experience, which in turn -- which in return strengthens our membership services revenue.
Going forward, we are more focused on the overall economics, not just pure subscriber growth. We dynamically adjust and carefully balance the number of subscribers and ARM based -- based on multiple factors, including content supply, user demand and market conditions. More importantly, we strive to enhance the overall healthiness and the revenue growth sustainability of our membership business. Providing exceptional user experience is key. To do so, we established a loyalty program that includes diversified privileges and benefits.
The long-term loyal numbers can enjoy more favorable pricing and privileges, reinforcing users' perception that early enrollment and a long-period subscription offer greater benefits. Just recently, we rolled out the Express Package program, which grants early access to the finale of our hit drama, the Lotus Casebook. Within the eight-day event, over 6 million subscribers have used their membership points to access the Express Package. Our first Express Package event received very positive feedbacks among numbers. As membership points are linked to the duration and the continuous subscription members with longer subscription periods are entitled to higher reward points and also accumulate points at a faster speed. We expect this initiative will further strengthen subscriber loyalty and drive member retention rate.
Moving on to content. We continue to execute our original company strategy and reinforce our brand image "as a diversified and a high-quality premium content powerhouse." In the first half of 2023, we have already released two dramas that broke the 10,000 popularity index score. As I mentioned earlier, we maintained the top position in the drummer market share for 6 quarters in a row. Original content remains the proper driver to our content supply and revenue. Among all major dramas released during the second quarter. Original content accounted for 67% with their share of revenue contribution remaining high. We kicked off our summer 2023 lineup with the release of Destined which was the fastest drama in our history to break 10,000 popularity index score. This was the ninth show that broke such score in our history, and the second title that did so this year.
In addition, Thirteen Years of Dust under our Mist Theater brand and Beauty of Resilience also received critical acclaim for their appealing stories. And at the same time, our original variety shows made their strong return, and their popularity remain as strong as strong as ever. Our market share for total variety shows was the highest in the industry according to Enlightent.
Even more impressive was the market share for our exclusive variety shows, which doubled sequentially. The highly anticipated shows launched in Q2 included our flagship, The Detectives' Adventures Season 3, The Rap of China 2023, HAHAHAHAHA Season 3, and innovative new shows such as Become A Farmer. This season of The Rap of China was a true hit, and scored the highest popularity index score for variety shows. Moreover, we have completed a holistic commercialization of the show, which expanded its cultural influence into other verticals including concerts, artist agencies, and merchandise. Songs from the show were also released on leading streaming music platforms such as Tencent Music and NetEase Cloud Music, driving record high music revenue for this IP. The third season of The Detectives' Adventures generated the highest popularity index score of any season. Additionally, "Become A Farmer" wrapped up in the second quarter, gained critical acclaim with a nomination for Best Variety Show at the well-known 28th Shanghai TV Festival Magnolia Awards.
We are also excited to see original content is widely recognized across TV stations in China in Q2. We distributed 30 dramas who to broad TV networks, including CCTV and provincial satellite channels with whom we have built long-term partnerships. Through these partnerships, we are able to expand our content's reach and grow its influence among different demographics. Heading into the second half of the year, we have a wide range of exciting and diversified premium content in the pipeline.
Our summer 2023 lineup has been bolstered by highly anticipated Asian costume dramas, including The Lotus Casebook which was the latest and the tenth drama that broke the 10,000 popularity index. Love You Seven Times also was launched and the Demon Hunter's Romance will follow. Moreover, we are broadening our presence in the crime drama genre with popular titles such as The Lost 11th Floor and Imperfect Victim, both of which have generated significant user traction and exceeded a popularity index of 9,000. Our offerings will be further enriched by the Bright Eyes in the Dark.
For this summer season, we have seen abundant high-quality new releases in both online drama series and offline theatrical movies. As media companies fiercely compete for users' attention, our top-notch content offerings have allowed us to maintain our leading position in the drama category. This once again proves our strength in the content business.
For variety shows, our pipeline in the second half will consist of both sequels to classic and innovative new IPs. Season 3 of The Big Brand makes its strong comeback, and other key programs include Let's BBQ, Housework Talent, and As You Wish which integrates crossovers from our hit dramas.
Our pipeline also includes other numerous exciting releases, including films, such as Fight Against Evil 2, and The Comeback, children's cartoon such as new seasons of Princess Doremi 3 and Deer Squad 3 as well as original animations including The Great Ruler, War Era: the Red Planet, and The Land of Miracles.
Moving on to advertising business? are delighted to see an accelerated recovery total ad revenue recovered to RMB 1.5 billion, up 25% annually and 7% sequentially. Both brand ads and the performance ads recorded annual and sequential growth.
In Q2, performance ad revenue doubled year-over-year and reached its historical high, and its growth accelerated on a sequential basis. This solid performance was driven by a combination of factors: one; securing higher share of ad budgets during the strong 18th shopping festival, two; targeted and efficient operations brought higher budget from key sectors such as internet services, e-commerce and games, three; optimizing algorithms for better ad performance and monetization efficiency, four; applying generative -- generative AI to enhance ad creation and ROI.
Brand ad revenue also grew annually and sequentially, benefiting from several factors: one; in the high season for food and beverage sectors, two; increased ad budgets during the June 18th shopping festival comparing with last year, three; with more robust pipeline of variety shows, contributing to an expanded ad inventory, and four; and a low base effect when compared to the same period last year. We also observed increasing demand for ads related to key dramas. With the improving quality of iQIYI originals, the number of advertisers signing annual contracts and the contract rate both increased meaningfully as compared to the same period last year. Hit drama Destined attracted over 40 brand advertisers, generated highest ad revenue among all dramas launched this year.
Heading into the second half, we remain cautiously optimistic about the outlook of overall advertising market. While we noticed a steady rebound in consumption sentiment, we do aware that the macroeconomic recovery will have a lagging effect on the brand advertising business. That said, we still hold positive view for the long-term growth of the brand advertising market in China. We expect certain counter-cyclical sectors including food and beverage, as well as those that benefit from re-opening policies, and recovering at a relatively faster pace.
Moving on to technology and products. Technical innovation is 1 of our core values. We keep improving content production and operational efficiency by driving technology innovation such as Generative AI, we have been applying a Generative AI in content production, marketing, user interaction, and received encouraging initial results. For example, through Large Language Models, scripts can rapidly be processed to extract key information, effectively accelerating the assessment process and improving budgeting and resource management.
Our internal data shows that the accuracy rate of scene and character breakdown aided by Generative AI has exceeded 90% so far. Besides, Generative AI can quickly assess intricate story plots to enhance the user experience by improving search results, recommendations, and playback interactive experience. Moreover, Generative AI has also been helping us in creating advertising ideas and boosting monetization performance. To give you an example, performance ads using Generative AI to produce ad content increased ROI by 20 percentage points.
Next, I'd like to give you some updates on our growth and early-stage businesses.
I will start iQIYI Lite, which continues to generate high-quality and healthy growth. This is being driven by our improving monetization capabilities. Impressively, iQIYI Lite has already been profitable at the operating level for 3 consecutive quarters. Total revenue reached historical high in Q2, up 35% year-over-year, with membership revenue increased by 87% annually, primarily driven by the ad-supported basic membership package.
Next, let's talk about business performance in regions outside of Mainland China. Our premium content continued to grow in popularity and we saw solid membership revenue growth. In particular, Hong Kong, the U.S. and Canada had annual growth of more than 50%. The cultural influence of high-quality original Chinese dramas is growing rapidly. Revenue generated by original productions increased by 160% year-over-year. An original Chinese drama Oh No! Here Comes Trouble became the top revenue title in Taiwan, Ancient costume dramas Destined and Beauty of Resilience topped the broadcasting lists in various markets including Southeast Asia, East Asia, and North America. With plenty of premium titles in pipeline for the third quarter, we continue -- we will continue to fortify our competitive edge for developing premium Chinese video content.
We will also continue to develop a closed loop in terms of content marketing and promotion, user growth, and subscriber acquisition, promoting Chinese content to a wider range of audience in the overseas markets.
In summary, we are pleased with the solid progress in our pursuit of high-quality growth. Looking forward to the second half this year, we will keep focusing on the long-term sustainability and health of our business to strengthen our competitive position in the long run. Our robust premium content pipeline will continue to create the flywheel effect, reinforcing the ongoing improvement of our business fundamentals. On top of our exceptional results, we will also closely monitor for the right opportunities and make selective strategic investments to further fuel the next wave of growth. We appreciate all your support and look forward to building greater value together.
Now, let me pass on to Jun to go through our financial performance.
Jun Wang
Thanks, Mr. Gong, and hello, everyone. As Mr. Gong mentioned earlier, we recorded our best ever second quarter results across multiple key financial metrics, such as total revenues and core membership services revenue, while the profits and the free cash flow remained robust. In addition, our balance sheet healthiness was further improved. Now let me walk you through key numbers.
Total revenues increased by 17% annually to RMB 7.8 billion, setting an all-time high for second quarter performance. We secured double-digit annual revenue growth across all business segments. Membership services revenue continued to serve as the most powerful growth engine with revenue exceeding RMB 4.9 billion, up 15% annually. Online advertising sped up its growth as revenues reached RMB 1.5 billion with an accelerated annual growth rate of 25%, which was fueled by the growth in both brand and performance ads, with performance ads being the key driver and to a lesser extent, from brand advertisement. The content distribution revenue and other revenues rose by 15% and 16%, respectively, on an annual basis as well.
Moving on to cost and expenses. Our cost of revenues increased by 10% annually, among which content costs increased by 7% annually. This was primarily driven by an increase in number of original dramas and variety shows launched during the quarter. Total operating expenses grew by 11% annually, largely due to the increase in SG&A expenses. We devoted more resources in marketing as we believe this could amplify our content influence, increase subscriber attractions, and enhance the strong momentum generated by our original content offerings.
Turning to profits and cash flows. Non-GAAP operating income reached RMB 786 million, up 129% annually, positive for 6 consecutive quarters. Free cash flow reached RMB 872 million, positive for 4 consecutive quarters. During the quarter, as a part of our liability management initiatives, we repurchased a total principal amount of USD 133.6 million of our convertible senior notes due 2026. In addition, the total interest-bearing debt decreased significantly quarter over quarter. As of the end of second quarter, the company had cash, cash equivalents, restricted cash, short-term investments and long-term restricted cash included in prepayments and other assets of RMB 6.1 billion.
To conclude, the second quarter results once again demonstrated that we are making solid progress in delivering high-quality growth, and we are well-positioned to generate greater value for our stakeholders in the long run.
For detailed financial data for the second quarter, please refer to our press release on our IR website. Now, we will now open the floor for Q&A.
Question and Answer Session
Operator
(Operator Instructions) Your first question comes from Xueqing Zhang of CICC.
Xueqing Zhang
(foreign language) My question is related to the membership business. The [ARM] had maintain a stable growth in the past 2 quarters. So with the longer-term target for ARM, also how should we think about the outlook for the membership service in the second half of this year and the longer-term?
Unidentified Company Representative
Thank you. We will invite Mr. Duan, who's responsible for the [membership service] business to answer the question.
Youqiao Duan
(foreign language)
Unidentified Company Representative
[Interpreted] Our membership business development have different focuses and strategies at different stages. In the initial establishment and rapid growth phase, the primary goal was to maximize the number of subscribers, which was focusing on growing the subbase. When subbase reached a significant size. For example, when our subbase was first in the market that exceeded RMB 100 million in 2019. Our objective shifted to membership revenue base on the revenue based on the market condition and our own strategy adjustment. So no longer purely just focus on the [subnumber].
Our membership revenue is determined by this base subscribers lifetime and ARM. Our goal is not only to focus on the current quarter revenue but to achieve long-term and substantial growth in membership revenue, taking a more long-term perspective in business planning and improving the overall health of our membership business.
Youqiao Duan
(foreign language)
Unidentified Company Representative
[Interpreted] In the future, we'll continue to adhere to the strategy we mentioned earlier. So first, we will continue to encourage subscribers to subscribe for a long period, increasing the proportion of long-term subscribers, we have already seen continuous annual growth in the scale and also the percentage of annual subscribers, and we hope this trend will continue.
Secondly, we will continue to systematically promote membership loyalty, particularly by enhancing the value perception of long-term subscribers. We have already implemented a series of measures, for example.
Youqiao Duan
(foreign language)
Unidentified Company Representative
[Interpreted] First, we provided discounted price and privileges for long-term subscribers, reinforcing members understanding that the earlier and longer you subscribe the better.
Youqiao Duan
(foreign language)
Unidentified Company Representative
[Interpreted] We introduced a membership loyalty program that contains membership points system, which favors long-term loyal subscribers. We believe this will improve user retention rate and enables the platform to generate mid- to long-term revenue from extended subscribing life cycles. For example, we built out the recent The [Lotus Casebook] for Express Package program, which was a meaningful application upgrade of our membership point. During the 8-day event, over 6 million subscribers have used their membership points to access that Express Package.
Youqiao Duan
(foreign language)
Unidentified Company Representative
[Interpreted] Overall, we believe with the improvement in membership value perception, we believe that the membership of loyalty and retention will naturally increase, driving the long-term growth in ARM and also membership revenue.
Operator
Our next question will come from Lei Zhang of Bank of America Securities.
Lei Zhang
(foreign language) We have seen that a key long-term review player launched the several content this summer with good performance. So I want to see how should we look at the change in enrollment? And how should I see the competitive advantage in content perspective? And same time, we noticed that offline entertainment actually saw strong recovery actually [movies] do we see any impact or benefit to our business.
Unidentified Company Representative
We will invite our CCO, Mr. Xiaohui Wang to answer this question.
Xiaohui Wang
(foreign language)
Unidentified Company Representative
[Interpreted] For this summer, we've seen the industry have a better supply of [high-quality] content, whether it's online dramas or offline theatrical movies. All of these are actually competing for users' attention. We are also pleased to see the flourishing of the long-form video industry. We believe with the improved from quality, the industry vitality has been activated, and we believe the market prosperity is beneficial for everyone.
Xiaohui Wang
(foreign language)
Unidentified Company Representative
[Interpreted] Under this backdrop, we have maintained our leading position in online drama driven by our high-quality original content. We have been leading the industry for 6 consecutive quarters in terms of the overall drama market share and also the exclusive market shares. Once again, we have with (inaudible) in Q2, which demonstrated our advantage and sustainability in the content business.
Xiaohui Wang
(foreign language)
Unidentified Company Representative
[Interpreted] As everyone knows the content industry is a long-term business. And the key to long-term success lies in the ability to continuously produce and supply high-quality content. In the core drama category, due to the nature of longer production cycle performance, our competitive advantage in this area is difficult to surpass in this quarter.
Xiaohui Wang
(foreign language)
Unidentified Company Representative
[Interpreted] Additionally, core market players are establishing differentiated advantages, focusing on original content and exclusive content. As such, the content differentiation has been greatly improved and the competition environment has been more benign and [rational].
Xiaohui Wang
(foreign language)
Unidentified Company Representative
[Interpreted] We believe that our advantage in the content business are foreseeable and sustainable, supported by 4 strong pillars, a mature and continuously improving content production mechanism, strong operating capabilities, leading technology capabilities and our top industry talent.
Xiaohui Wang
(foreign language)
Unidentified Company Representative
[Interpreted] In the future, we will continue to firmly adhere to innovation, payment content, diversification and continuously seeking (inaudible) through innovation and research. Also, while ensuring the quality of projects, we will carefully plan our production to ensure a long-term and sustainable supply of diverse premium content.
Xiaohui Wang
(foreign language)
Unidentified Company Representative
[Interpreted] Regarding the recovery of offline entertainment. On one hand, we will continue to focus on our strength, concentrating on the production and operation of our content online. On the other hand, the recovery of offline theatrical movies will benefit online video platform after second window movie (inaudible) will recover and increase.
Operator
Our next question today will come from Alicia Yap of Citigroup.
Alicia Yap
(foreign language) I wonder if management could share with us what's your view on the overall brand advertising market outlook for the second half this year? Have you observed any major shift of budget sentiment from advertiser? And (inaudible) modify any of your advertising strategy.
Chang Yu
We'll invite our Senior VP of Brand Ad Business, Wu Gang to answer the question.
Gang Wu
(foreign language)
Unidentified Company Representative
[Interpreted] I see overall advertising business has been in a continuous recovery rate with brand advertising rebounded in Q2, growing both year-on-year and also quarter-on-quarter.
Gang Wu
(foreign language)
Unidentified Company Representative
[Interpreted] After economy recovery takes time to reflect in the brand advertising market, we hold us cautiously optimistic attitude towards the brand advertising market for the second half of this year.
Gang Wu
(foreign language)
Unidentified Company Representative
[Interpreted] Because we think (inaudible) is one of the platforms in the Chinese Internet industry that has the highest user quality as well as strong consumption power and a user's willingness to pay, so we are an indispensable choice for advertisers in enhancing their brand influence.
Gang Wu
(foreign language)
Unidentified Company Representative
[Interpreted] We have been seeing increasing recognition from advertisers for our content and also innovative products. The contract signing amount of content marketing advertisement has been driven by top-notch drama and variety shows and there have been a strong preference and acceptance from advertising -- from advertisers for our innovative ad products.
Gang Wu
(foreign language)
Unidentified Company Representative
[Interpreted] Under the current macro environment, that advertisers from different sectors are formulating corresponding advertising strategies based on the strategic vision, and also the long-term market view, among which certain brand advertisers with forward-looking strategic vision may increase their ad spending, seizing marketing opportunities by [advertising] in the market.
Gang Wu
(foreign language)
Unidentified Company Representative
[Interpreted] Looking at the specific sectors, we are optimistic for the food and beverage industry, cosmetic and personal care industries as well as the transportation industry, which also includes the new vehicle -- new energy vehicle.
Operator
Our next question today will come from Lincoln Kong of Goldman Sachs.
Lincoln Kong
(foreign language) So my question is about the performance advertising here. What we're seeing a continued recovery of performance ads in the first half. How do we think about the second half outlook for this set of business?
Chang Yu
I will invite our CTO, Wenfeng to answer this question.
Wenfeng Liu
(foreign language)
Unidentified Company Representative
[Interpreted] For performance ad revenue has maintained its annual growth for 5 consecutive quarters, with the growth rate continues -- with actually the growth rate that continues -- continuously accelerating and its contribution in total ad revenue has continued to increase, reaching a historical high in Q2.
Wenfeng Liu
(foreign language)
Unidentified Company Representative
[Interpreted] It is expected that the performance ad sector will continue to experience strong growth in second half of this year, benefiting from our improved market capability, attracting more advertising budget from key industries such as internet services, e-commerce and gaming. Now also, we believe with the algorithm optimization and the support of Generative AI, performance ad results will bring the outperformance and also monetization efficiency to improve.
Wenfeng Liu
(foreign language)
Unidentified Company Representative
[Interpreted] In the future, we think the performance ad advertiser will pay more attention to cost effectiveness and also the advertising performance, striving to achieve additional conversion and also to maximize returns on investment. We will -- going forward, we will continue to strengthen ad creativity, content personalization and interactivity. We will also leverage new technologies like Generative AI to lower ad production costs and also enhance any ad delivery efficiency, adapting to the ever changing market and user demand. From the ad sectors perspective, for the second half of this year, we think we have a positive outlook different sectors, for example, the traditional e-commerce platform, live streaming e-commerce, culture and entertainment, harbor and tourism and also the lifestyle food industry.
Operator
Our next question will come from [Maggi Ye] of CLSA.
Unidentified Analyst
(foreign language) Now that the company has generated very strong operating cash flow and free cash flow this quarter and has also repurchased convertible notes. Please, could you share with us more about your thoughts on the company's debt level management and plans for financial resources in the coming quarters?
Chang Yu
We will invite Mr. Jun, our CFO, to answer this question.
Jun Wang
I think for the interest of time, I'll just answer the question in English directly. So I think this is a question that we constantly receive and the inquiry that we constantly receive from the investor community as well. And our answer is very straightforward. First and foremost, we are in a [project] on continuously improving our capital structure. We are still making -- trying every effort to make our balance sheet more healthier and more robust, and this is what we do.
And secondly, I think within our framework, doing that, there are two things that really matters. The first and the most important thing is actually to continuously generate sizable free cash flow. Just to remember, generating sizable cash flow means natural deleverage regardless of whether we will (inaudible) the debt buyback or not. And this is really the key and this is what we have been very proud to see our progress in the past couple of quarters. And the second thing is to develop a serious and comprehensive set of the choices to see what we can do to benefit our shareholders best. And these set of choices will include, for example, the debt buyback, but it will also include to explore the opportunity to invest for safe returns. And as we all know, the external environment has been extremely dynamic with a rise in interest rate and actually provide return opportunities for the company with free cash flow.
So with that being said, I think our overall principle remains the same. We explore every opportunity to create value for our stakeholders, including our shareholders and our supporting debt holders then -- but without compromising the safety of our business for sure.
Operator
This will conclude our question-and-answer session. At this time, I'd like to hand back to management for closing remarks.
Chang Yu
Thank you, everyone, for participating in the call today, and please do not hesitate to ask us if you have any further questions. Thank you, and we will see you next quarter.
Operator
The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines.
