Iqiyi Earnings: Content Distribution Strength a Highlight, but Membership Churn Concerns Resurface

We maintain our fair value estimate for Iqiyi at $5.20 after it reported first-quarter revenue of CNY 7.9 billion, which was 2% better than our estimate, driven by a 28% increase in content distribution business but offset by a 13% decline in membership revenue. We estimate that membership levels declined by 23% year on year to 99 million users. While we anticipated a falloff in memberships and revenue due to a high base effect last year from Iqiyi’s hit drama, the decline was worse than expected. Further compounding the issue is management’s decision to no longer disclose the number of memberships, which underscores our concern over its ability to retain a consistent level of users on its platform. However, operating margin (excluding stock-based expense) increased by 140 basis points to a record-high 13.7%, likely driven by content distribution revenue growth, which also reached a record-high $928 million.