Q2 2023 iQIYI Inc Earnings Call
Speaker 1: Thank you for standing by and welcome to the IGE Second Quarter 2023 Earnings Conference call.
Thank you.
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. Cheng Yu, IR Director of the company. Please go ahead. Thank you, operator. Hello, everyone, and thank you for joining ITE's second quarter of the year.
Earlier today and are available on the company's investor relations website at IR dot ITE com on the call today are mr Lu Gong a founder director and CEO . Mr. Ching-Hong or CFO . Mr Shao-Hui Wang our CCO chief content officer. Mr. Wen-Feng Liu
our CTO, Chief Technology Officer, Mr. Youchao Guan, Senior Vice President of our membership business, and Mr. Gong Wu, Senior Vice President of Brand Advertising Business.
Mr. Gomes will give a brief overview of the company's business operations and highlights, followed by June 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 Security Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to defer materially to parker expectations.
Potential risks and uncertainties include but are not limited to those outlined in our public filings with the SEC.
ITE does not undertake any obligation to update any forward-looking statement except as required under applicable law. I will now pass on the floor to Mr. Gohme. Please go ahead.
Hello everyone. Thank you for joining us today. Our focus over the corner remains firmly on generating high quality growth.
Our original content strategy continued to deliver top-notch titles, which in turn,
brought the strongest second-color performance in our history in terms of key metrics such as total granules, profits,...
free cash flow and average daily subscribers during the call-in. Also, we maintain our industry leading position across various key aspects.
The exceptional quarterly results clearly demonstrate the resilience and immense long-term growth potential of our business.
Now let me walk you through the key developments in the second quarter.
Firstly, we maintain our industry leading position in drama market share for thick consecutive corners. According to Enlightened, we maintain our industry leading position in drama market share for
Our original drummers continue to play major roles in terms of continued supply and the revenue contribution.
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testing Chengdu broke IT popularity index records by exceeding 10,000 scores in the shortest time. In addition, type holds such as 13 years of doubt.
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Yunxiang Dua generated highly positive water of month reviews, reinforcing our brand image diversifier and high quality premium content powerhouse. … Blues venture partnership …
We have the best second quarter revenue performance in August 2018 at 17% year-over-year. We recorded double digit annual revenue.
growth across all key business lines. Membership services, revenue, grow 15% annually and advertising revenue of raw and 25% annually.
Meanwhile, non-GAAP operating income hit RMB 786 million worldwide 129% annually, marking the sixth conceptual quarter of the profit term.
Furthermore, our ability to generate cash further stressing with free cash flow reaching RMB 872 million.
positive for our consecutive corners.
Our performance in the second quarter represents another solid step in the pursuit of high quality growth.
As we previously mentioned, IT and the Intel industry have been completely transformed with vision.
In the recent competition, we have seen improving returns on investment for the handheld streaming industry. And as an industry leader, IT largely impacts original company's ability to financial performance.
a new market standard that grabs the overall industrial advancement.
In light of this, we aim to enhance the long-term health of our content production and operation so that we can consistently perform the industry.
Now, let's dive deeper into the performance of our core business segment.
starting with membership choices.
During the quarter, both membership revenue and the number of subscribers hit all-time high for a second quarter. Membership revenue exceeded RMB 4.9 billion a 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 given by our refined operating strategy.
For example, we optimized our pricing strategy which effectively narrows the gap between the listing and the actual rate.
Average daily number of total subscribers in Q2 reached 111.2 million at 13% year-over-year, primarily driven by our table supply of content that continues to attract.
attract and return members. Subscriber base decline on sequential basis primarily due to one, the impact of seasonality and two, the high base effect after the release of the net cost.
And then the next one, attrition of the network.
It's part of 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 return a threat or membership facility threatened.
going forward, we are more focused on the overall economics, not just.
not just pure subscriber growth.
with seven nuclei adjusted and calculated by the number of subscribers on the arm basis.
based on multiple factors including content supply, user demand and market conditions.
More importantly, we strive to enhance the overall health needs and the general growth, the sustainability of our membership business, providing exceptional user experience is key.
In the next slide, we establish a loyalty program that includes diversity fund, privilege, and benefits.
the long term long-term.
members can enjoy more favorable pricing and private privilege.
reinforcing users' perception that early enrollment and long-term subscription offer greater benefits.
Just recently, we go out the Express package program, which runs fully access to the...
The finale of his drama, The Lotus Kid's Book. ya halo
Within the NPS event, over 6 million subscribers have used their membership points to access the web normally available format.
Our first Express package event received very positive feedback among members.
As membership points are linked to the duration and continuous subscription, members with longer subscription materials are entitled to higher reward points and also accumulate points at a faster speed.
We expect this initiative will further strengthen subscriber loyalty and the joint member retention rate.
Moving onto the content.
We continue to execute our original content strategy and reinforce our brand image as a diverse product and a high quality premium company for our house.
In the first half of 20... 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 drama market shop for thick colors in the room.
Original content remains the primary driver to our container supply and revenue among all major cameras released during the second quarter.
original content.
accounted for 67%.
We think there are a share of the annual contribution remaining high.
We kick off of SAML 2023 with the release of...
which was the fastest drama in our history to break.
10,000 popularity index scores. This was the ninth show that brought such scores in our history, and the second title that did so this year. In addition,
13 years of that and there are Mr. shelter brand and the beauty of being a Moss
Farong also received critical acclaim for their appealing stories.
At the same time, all original variations mean they are strongly trimmed and their popularity remains as strong as ever.
market share for total market shows was the highest in the industry according to invited.
Even more impressive was the market share for all inclusive variety shows, which doubled sequentially.
The highly anticipated show launched in Q2 included our flagship, the Detective Adventure Season 3,ES Snowfall.
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and innovative new shows such as Become a Farmer.
This season of the Dragon Hawk Channel was a true hit.
and scored the highest population index score for variety shows. Moreover, we completed a highly thick commercial edition of the show.
which expanded its cultural influence into other verticals including concerts.
artists, agencies, and merchandise.
dumped from the shore.
were also related to leading streaming music platforms such as Tencent Music and NetEase Cloud Music, driving rock power high music value for this IP. The third reason of the Roundup Diamond Trleaf...
generated the highest popularity in dense core of any reason. Additionally, become a farmer wrapped up in the second quarter gained critical acclaim with a nomination for the fact of what I already saw.
at the Wyoming 28 Shanghai TV Festival Mongolia Awards.
We are also excited to see original content as widely recognized across TV stations in China in Q2. We distributed 30 dramas to broad TV networks, including CCTV and provincial and central artair failed to this day in which heartbreakingenter statewide, we From brothi from piggy literacy
with whom we have built long-term partnerships.
So this partnership, we are able to expand our content reach and grow its influence among different demographics.
Heading into the second half of the year, we have a wide range of findings and that works upon the premium content in the pipeline.
on summer 2023, IR has been bolstered.
by highly anticipated Asian custom dramas, including the Lotus Cakebook, which was the latest under the tense drama that bought the 10,000 popularity index.
will significantly less interesting with a short film later for the future performance.
Demon Hunter romance will follow.
Moreover,
We are broadening our presence in the crime drama, Jiro, with popular titles such as The Lost Eleventh Block, X' reviews, however Indra, who is an ancestady al fine,Gaming X Y.
both of which will challenge.
The Java-related significant user collection can exhibit a popularity index of 9,000.
Our offering will be further enriched by the White Eyes in the Dark, Ha Tong Huo, and Hmong
For this summer season, we have been abundant high-quality news releases in both online drama series and offline theatrical movies at media companies.
For this summer season, we have been abundant high quality new releases in both online drama and offline musical movies at media companies.
They also compete for users' attention. Top-notch content offerings have allowed us to maintain a leading position in the Drama category.
This one again proves our trend in the content business.
The four-var tissue or pipeline in the second half will consist of both sequels to classic and innovative new IPs. We have three of the big five. Yes, we have the jacket. Next question.
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Our pipeline also includes other numerous exciting releases, including films, such as
fight against the evil two.
and come back in Hoi Hui Sha to the backbone, such as new season of apprenticeship for a meet.
and the L-SPOC-3, as well as original animations including the Great Roller, Battleback, War of the Red Planet, and the Land of Miracle.
Moving on to advertising business, we are delighted to see accelerated recovery. Total LUMU recovered to RMB 1.5 billion up 25% annually and 7% sequentially.
Both brand F and performance F we call it annual and sequential growth in Q2.
Performance at the revenue doubled year over year and reached a historical high, and its growth accelerated on a sequential basis.
This solid performance was driven by a combination of factors.
1. The current higher-end share of ad budgets during the June 18th shopping festival. 2. The current higher-end share of ad budgets during the June 18th shopping festival.
and efficient operations brought higher budgets from key sectors such as Internet services, e-commerce and games.
three, optimizing algorithms for better performance and monetization efficiency and four, applying generative.
A generative AI means have add, creation and ROI.
The brand and brand will also grow annually and sequentially, benefiting from several factors.
Q2 is the highest season for food and beverage sectors.
Two, increased ad budgets during the June 18th shopping festival compared with last year. Three, more robust pipeline of wirepicks shows contributing to an expanded ad inventory. And the four.
and a low base effect when compared to the same period last year.
We also observed increasing demand for apps related to key grammars, with an improving quality of IT originals, the number of advertisers signed annual contracts, and the contracts rigged forblue.
both increased meaningfully as compared to the same period last year.
Handing into the second half, we remain cautiously optimistic about the outlook of overall AI and what's in market. We are not being noticed as they have been.
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We are aware that the microeconomic recovery will have a lagging effect on the brand.
We still hold positive view of the long-term growth of the brand advertising market in China. We expect certain content to be more effective in the long-term growth of the brand.
and the second sector including food and beverage as well as those that benefit from reopening policy and recovering on a relative faster pace.
Moving on to technology and products, technical innovation is one of our core realities.
We keep improving content production and operation efficiency by driving technology innovation, such as generative AI. We have been applying generative AI in content production.
user interaction and receive encouraging initial results.
for example, so large language model scripts
can 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 aimed by generative AI has exceeded 90% so far.
Besides, generative AI can quickly assess
to indicate authority flaws to enhance the user experience by improving such results.
recommendation and playback interactive in Paris.
Moreover, generative AI has also been helping us in creating advertising ideas and boosting monetization performance.
To give you an example, performance as using generative AI to produce a content increase ROI by 20% points.
Next, I'd like to give you some updates on our growth and early stage business.
and start with IT life, which continues to generate high quality and healthy growth.
This is being driven by our improving magnetization capabilities.
Interestingly, IT life has already been profitable at the operating level for three consecutive quarters. Total revenue reached a historical high in Q2 of 35% year-over-year.
with membership revenue increased by 87% annually, primarily driven by the ad-supported basic membership package.
Let's talk about...
business performance in regions outside of mainland China, of premium content continuing to grow in popularity.
And we saw solid membership value growth, in particular Hong Kong, the U.S., and Canada.
had annual growth of more than 50%.
The cultural influence of high quality, renewable Chinese drama is growing rapidly. The annual damage by our remote production increased by 160% year over year.
An original Chinese drama, Oh No! Here Comes the Travel.
An original Chinese dramabooks Here Comes
became the top revenue title in Taiwan. Ancient custom dramas, and a building of related districts topped the broadcasting list in various markets, including...
and Southeast Asia, East Asia, and North America. With plenty of premium titles in pipeline for the third quarter, 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 audiences.
in overseas markets.
in our pursuit of high quality growth. Looking forward to the second half this year, we will be focusing on...
the long-term sustainability and health of business with stressing out competitive positions in the long run.
Our robust premium content pipeline will continue to create the flywheel effect, reinforcing the online improvement of our business fundamentals.
On top of exceptional results, we will also closely monitor the right opportunities and make selective strategic investments to further fill the next wave of growth.
We appreciate all your support and look forward to building these various cameras. Now let me pass to Jun to go through the natural performance.
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 call membership services revenue, while the profits and the free cash flow remained robust. In addition, we also recorded our best-ever second quarter results across multiple key financial metrics, such as total revenues and call membership services revenue, while the profits and the free cash flow remained robust.
how abandoned 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 components. We secured double-digit annual revenue growth across all business segments. Total services revenue continued to serve.
as the most powerful growth engine with revenue exceeding RMD 4.9 billion, up 15% annually.
Online advertising spanned up its growth as revenue reached $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 as being the key driver and to a lesser extent from brand advertisement. The accounting distribution revenue and other revenues rose by 15 and 16% respectively on any basis as well.
We'll be on to cost and expenses.
our cost of revenues increased by 10% annually, among which, government 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 attraction, 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 six contextual waters.
Free cash flow reached RMB 872 million positive for four consecutive quarters.
During the flood, as part of our liability management initiatives, we repurchased a total principal amount of USD $133.6 million of our convertible senior notes due to some mistakes. In addition,
The total interest bearing debt decreased significantly quarter for quarter. As of the annual second quarter, the company has cash, cash equivalents, restricted cash, short-term investments, and long-term restorative cash included in the prepayments and out-of-assets.
a totaling 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 website.
Now we will open the floor for Q&A.
Q&A.
Thank you.
If you wish to ask a question, please press star then one on your telephone and wait for your name to be announced.
If you wish to cancel your request, please press star then two.
Please ask your question in Chinese first, then repeat in English.
We ask that questions are limited to one per person. Please rejoin the queue to ask any follow-up questions.
Your first question comes from Shikweng Zhang of CICC. Please go ahead.
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membership business. The ARM has maintained stable growth in the past two quarters. So what's the longer term target for ARM? Also how shall we think about the outlook for membership service in the second half of this year and the longer term? Thank you.
Thank you. We will invite Mr. Duan, who is responsible for the next group of business, to answer the question.
Thank you.
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Okay, our membership business development has 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 sub-phase.
When the sub-base reached a significant size, for example, when our sub-base was first in the market that exceeded $100 million in 2019, our objective shifted to membership revenue based on the market condition and our own strategy adjustment....
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Our membership revenue is determined by this update, subscriber 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 distance planning and improving the overall health both our membership business.
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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.
First, we provided discounted price and privileges for long-term subscribers.
reinforcing members' understanding that the earlier and longer you subscribe, the better.
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We introduced a membership loyalty program that contains membership polling systems, which favors long-term loyal subscribers. We believe this will improve user retention rates and enable the platform to generate mid-to-long term revenue.
from extended subscribing lifecycles. For example, we wrote out the recent Lotus Caper 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 the Express package.
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Overall, we believe with the improvement in membership value perception, we believe that the membership loyalty and retention will naturally increase, driving the long-term growth in ARM and also membership revenue.
Thank you. Our next question will come from Li Zhang of Bank of America Securities. Please go ahead. Hi, everyone. My name is Li Zhang. I'm a senior at Bank of America Securities. I'm a senior at Bank of America Securities.
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We have seen that a key long-form video player launched several content experiments with good performance. So we want to see how should we look at the change in the environment and how should IT keep the competitive advantage in content perspective.
At the same time, we noticed that offline entertainment actually saw strong recovery, and we thought that the movie was a great movie. Do we see an impact or benefit to our business? Thank you.
Thank you, Le. We will invite our CCO, Mr. Xiaofui Wang, to answer this question.
Thank you.
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For this summer we've seen the industry have a vintage supply of high-quality content, whether it's online dramas or offline theoretical 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 comfort quality, the industry vitality has been activated, and we believe the market prosperity is beneficial for everyone.
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Under this backdrop, we have maintained our leading position in online dramas driven by our high quality original content.
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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 for dramas, our competitive advantage in this area is difficult to surpass in the short term.
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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 irrational.
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We believe that our advantages in the content business are foreseeable and sustainable, supported by four strong pillars. Our mature and continuously improving content production mechanism, strong operating capabilities, leading technology capabilities, and our top industry talent.
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In the future, we will continue to firmly adhere to innovation, streaming content, diversification, and continuously seek annual breakthroughs through innovation and research.
Also, while ensuring the quality of projects, we will carefully plan our projections to ensure a long-term and sustainable supply of diverse premium content.
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Regarding the recovery of offline entertainment, on one hand we will continue to focus on our strengths, concentrating on the production and operation of our content online. On the other hand, we will continue to focus on our strengths and operation of our content online.
The recovery of offline theoretical movies will benefit online video platforms. After the second window movie supply will recover and increase.
Thank you. Our next question today will come from Alicia Yap of Citigroup. Please go ahead. Then we will open it up for the public to view and you of view.
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Thanks for taking my question. 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 advertisers and will IT modify...
Our senior VP of brand-new business will come to answer the question.
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IT's overall advertising difference has been in a continuous recovery rate with friend advertising rebounded into two.
growing both year on year and also quarter on quarter.
As the economy recovery takes time to reflect in the brand advertising market, we hold a cautiously optimistic attitude towards the brand advertising market for the second half of this year.
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Because we think that ITE 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.
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We have been seeing increasing recognition from advertisers for our content and also innovative products. The contrary finding amount of content marketing advertisement has been through them by top-notch dramas and variety shows. And there has been a strong preference and an acceptance for advertising.
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Under the current macro environment, brand advertisers from different sectors are formulating corresponding advertising strategies based on their strategic vision and also the long-term market view, among which certain brand advertisers with forward-looking strategic vision may enhance their-
in the next lecture.
Looking at the specific sectors, we are optimistic for the food and beverage industry, cosmetic and personal care industry, as well as the transportation industry, which also includes the new vehicle, new energy vehicles. Thank you.
Our next question today will come from Lincoln Kong of Goldman Sachs. Please go ahead. Good afternoon everyone.
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continue recovery of our opponents as in the first half, how do we think about the second half outlook for this set of business? Thank you.
Thank you again. We'll invite our RCTO, Wenfeng, to answer this question.
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For performance, ad revenue has maintained its annual growth for five consecutive quarters, with the growth rate continuously accelerating. And its contribution in total ad revenue has continued to increase, reaching a less historical high E2.
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it is expected that the performance app sector will continue to experience strong growth in the second half of this year, benefiting from our improved market capability, attracting more advertising budget from key industries such as NNI services, e-commerce, and gaming. Now also, we believe with the algorithm optimization.
and the support of generative AI, performance ads results will bring the app performance and also monetization efficiency to improve.
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In the future, we think the performance ad advertiser will pay more attention to cost effectiveness and also advertising performance, striving to achieve efficient conversion and also to maximize returns on investment.
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 and add delivery efficiency.
adapting to the average income market and usage again. From the app sector's perspective, for the second half of this year we think we have a positive outlook on different sectors. For example, the traditional e-commerce platform, like streaming e-commerce.
culture and entertainment, travel and tourism, and also the lifestyle tools industry. Thank you. Our next question will come from Maggie Yi of CLSA. Please go ahead. Please proceed.
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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? Thank you.
Thank you, Maggie. We will invite Mr. June , our CFO , to answer this question.
Sure. Thanks, Maggie, for the question. 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, an inquiry that we constantly receive from the investor community as well. And our answer is very straightforward.
First and foremost, we are in a process of continuously improving our capital structure. We are still trying every effort to make our energy more healthy.
healthier and more robust. And this is what we do. And secondly, I think within our framework of doing that, there are two things that really matter. The first and the most important thing is actually to continuously generate sizable free cash flow. Just remember,
Generating sizable cash flow means net of the leverage, regardless of whether we will conduct the debt buyback or not.
And this is really key, and this is what we have been very proud to see our progress in the past couple quarters.
And the second thing is to develop a serious and comprehensive set of choices to see what we can do to benefit our shareholders best. And this set of choices will include, for example, the DAPBAP.
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 the rise in interest rate and actually provide return opportunities for the company with a 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 data holders. But without compromising...
the safety of our business for sure. That's it. Thank you. This will conclude our question and answer session. At this time, I'd like to hand back to management for closing remarks.
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. Thank you. Thank you. Bye bye.
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. Thank you. Thank you. Thank you.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect your lines.