IQIYI Inc (IQ) Q1 2019 Earnings Call Transcript

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IQIYI Inc (NASDAQ: IQ)
Q1 2019 Earnings Call
May 16, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to iQIYI First Quarter 2019 Earnings Conference Call. Well, at this time, all participants are in a listen-only mode. Today's call will include a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today, Friday 17 of May 2019.

I'd now like to hand the conference over to your first speaker today Ms. Dahlia Wei, Investor Relations Director. Thank you. Please go ahead.

Dahlia Wei -- Investor Relations Director

Thank you, operator. Hello, everyone and thank you all for joining iQIYI's first quarter 2019 earnings conference call. The conference results were released earlier today and are available on the Company's Investor Relations website at ir.iqiyi.com. On the call today are Dr. Yu Gong, our Founder, Director and CEO and Mr. Xiaodong Wang, our CFO. Dr. Yu will give a brief overview on the Company's business operations and highlights, followed by Xiaodong who will go through the financials and guidance.

After their prepared remarks, we'll hold a Q&A session.

Before we proceed, please note the discussion today will contain forward-looking statements made under the Safe-Harbor provisions of the US 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 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.

With that, I will now turn the call over to Dr. Gong. Please go ahead.

Yu Gong -- Founder, Chief Executive Officer and Director

Hello, everyone and thank you for joining us for our first quarter 2019 earnings call. We achieved another solid quarter of results. Total revenues were RMB7.0 billion , up 43% year-over-year. Total subscriber members reached 96.8 million as of end of March. This number does not include any past subscribers and it represents a 58% growth from a year ago. We continued to stressing our plan for attracting new users and increase user experience.

During the first quarter, average DAU of mobile apps and the total user time spent both achieved double-digit growth year-over-year. iQIYI continued to rank number one among online video platform in China, in terms of mobile NAU -- mobile DAU and the total time spent according to third party tracking data of iResearch and the customer belt.

Let me start my review with our membership business. During the first quarter, total revenues for our membership business increased by 64% to RMB3.4 billion . Total subscribers reached 96.8 million at quarter end, representing a net addition of 9.4 million from last quarter. This was mainly attributable to our premium content and targeted marketing campaigns.

In terms of premium content, we released several high quality original drama during the quarter such as The Legend of Haolan, The Golden Eyes, The Legend all of which quickly saw subscribers growth. Licensed dramas such as The story of Minglan, All is Well and I Will Never Let You Go also contributed to subscribers conversion as we granted subscriber early access to watch. In addition, while our variety shows such as Idol Producer 2, our self-produced young inspiration a variety show and one romantic travel season two a reality show, we offer actual added shows, we've been privileged on our value added services to members, which helped further drive subscriber growth.

On the marketing side, we took advantage of winter vacation and the Chinese New Year holidays when many young people returned from big cities to their hometown and targeted marketing campaigns to increase user penetration into a low tier cities and and older age growth.

Moving to our advertising business. During the first quarter, ad revenues remained largely flat compared to a year ago. Looking ahead, we maintain a cautious outlook on advertising due to the softer macroeconomic environment in China and slower-than-expected recovery of our in-feed advertising. We believe our premium content and innovative ad solutions will continue to serve as a key driver of future performance for our advertising business.

During the first quarter, our highly popular self-produced variety show continued to build upon the solid foundation, while our advertising business for example Idol Producer 2, accompanying first our online variety show, workings of Baidu and Weibo. As a result, ad revenues generated from their show reached a historical high, we also produced variety shows on our platform.

At the same time, we are also introducing new innovative ad solution such as immersive marketing, which helps convert the shows highly supportive fans into customers of our advertisers. This demonstrates the value we bring to enhancing brand awareness and increasing advertising ROI. As I mentioned on our last earnings call, we are looking to improve advertising monetization of our original dramas in addition to their role in driving subscription growth.

During the first quarter, our original drama, The Legend of Haolan, The Golden Eyes and The Legend all went ahead of industry peers in terms of popularity and the traffic according to third party statistics enlightened Chinese name (foreign language). This helped increase ad revenues from our original content to a higher percentage of total ad revenue. During the first quarter, the other business continued to gain momentum, with revenues growing 143% year-over-year. This demonstrates the success we have had in diversifying our revenue streams and in building multiple engines for the company. The growth was broad based and to a large extent driven by our gaming business, which performed better than expected.

Now we know -- our content strategy, quality and innovation form the core of our content production. We remain committed to incorporating Chinese culture values into our content and pay attention to detail. Our content library is getting enriched everyday as we continue to deliver high quality content covering young, fashion, suspense, real estate and historic sales among others.

Entering Q2, we have released some original content such as the New Legend of White Snake, a remake of the classics drama based on a well known Chinese folk tale. The Thunder and anti-drug plays and detective serials and I am a singer, songwriter index with reality show. In particular our original drama series, The Thunder, has not only been well received by our users, but also highly acknowledged by government officials and it becomes the first original series aired during primetime on drama channel of CCTV. Furthermore, it is expected to hit international market soon by HBO, which acquired by the Southeast Asia licensing right of the show.

For the rest of the year, our content pipeline remains very strong as many of you may have discovered at our IT World Conference last week. In addition to the upcoming slate of high quality drama -- high quality drama serials and variety show. We are also making effort to tap into original theatrical movie (foreign language). For the first time in the industry, we officially announced a vendor named the Interactive Video Guide, along with interactive video platform, the standard and also tools were designed to empower our content partners to produce more interactive drama or workshops with lower cost and the lifetime.

We are constantly enhancing our IP-centered ecosystem as a leading content distribution platform and IP powerhouse. We have incubated various types of content in the form of literature, like novels, accounts and comics, as well as dramas, movie, reality show, animation and even online games. This allow us to fully leverage the value of our IP based production and in monetizing them. So, diversified channels for example saw project Yunteng we released health drama and movie titles adapted from literature IP last year and the way it's best to adapt roughly above another 80 literature titles into video content this year.

Our self-produced variety show, Idol Producer not only allow us to expand our business territory to talent agency and also led to the creation of IP agency product with more than 200 SKUs. Another more recent example is our game business, our subsidiary Skymoons launched 3D turn based mobile game, the Cruise, which is based on an DreamWork IP lesson from DreamWorks Animation 2013 popular animated feature film, The Croods. That again has performed impassionately well since it was launched in February exceeding our expectation. This is another showcase of our ability to abstract IP into online games.

And lastly, I'd like to finish my discussion with technology. As a technology based entertainment company, our business development relies on the continued innovation of both technology and the products. Recently, on the 5G roll out, we began collaboration with various carriers such as China Unicom for the commercial application of 5G technology to Internet media. On March 18th, we launched our 8K VR vitro experiment Center as China Unicom point of IT innovation showroom in Beijing.

In addition, we launched an innovative service (inaudible) which integrates feed in technology with 5G Mobile Edge Computing. It allows ample bandwidth and the minimal latency of 5G to effectively ensure high frame rate, when watching videos and upgrades our interactive experience. In the future, (inaudible) can be used in hotels, airports, Universities, shopping malls and other locations which will allow users to enjoy a smoother experience when watching our extensive collection of high quality video content.

After commercialization of 5G terminology rolled out, we will continue expand our usage scenarios and ensure premium entertainment experience for our users. To wrap up, we had a strong start to the year of 2019 with that of solid results during the first quarter, especially in our membership business. As our subscribers base is coming to scale, benefiting from China's growing GDP per capita when exceeded USD9,000 in 2018. We believe Chinese online entertainment industry has entered a new growth space with enormous opportunities for the years to come.

We are at the forefront of the right industry at the right time. And we will continue to leverage our platform under one page. Other one, our technology innovation and attract talent in order to capture the tremendous growth potential ahead. We remain committed to our vision of becoming technology based entertainment and driving sustainable long-term value for our shareholders.

With that, I will pass the call to Xiaodong to go over the financials.

Xiaodong Wang -- Chief Financial Officer

Good morning, everyone. Let me go through our financial highlights. For the first quarter of this year 2019, iQIYI total revenue was RMB7 billion , up 43% year-over-year. The increase was primarily driven by a strong growth of our membership service, next to our premium content and our various operational initiatives. Membership service revenue was RMB3.4 billion , up 64% year-over-year. This was driven by strong growth in the number of subscribers, which reached 96.8 million at the end of the first quarter. Online advertising service revenue was RMB2.1 billion flat year-over-year due to macro softness and the slower-than-expected recovery of our in-feed price. Content distribution revenue was RMB442.6 million, up 66% year-over-year. This increase were driven by a number of premium content title we distributed.

Other revenues were RMB982.5 million, up 143% year-over-year. The increase was driven by strong performance across various business lines especially in the robust growth of our game business after the acquisition of Skymoons, which launched several successful games during the first quarter. Moving to the cost of revenues. Our cost of revenue was RMB7.3 billion , up 50% year-over-year. The increase was primarily driven by the high content cost, as well other cost items. Content costs was RMB5.3 billion , up 38% year-over-year.

Turning to the operating expenses. SG&A expenses were RMB1.1 billion , up 62% year-over-year, primarily due to the increased share-based compensation expenses and higher marketing spend on games after the consolidation of Skymoons. Our R&D expenses were RMB598.1 million, up 54% year-over-year. The increase was primarily due to our continued investment in R&D personnel. Operating loss was RMB2 billion compared with operating loss RMB1.1 billion in the same period last year. Operating loss margin was 29% compared to operating loss margin of 22% in the same period of last year.

Total other income was RMB211.1 billion compared with total other income of RMB666.2 billion during the same period last year. The year-over-year variance was mainly due to the fair value we recognized in the first quarter last year, arising from our private company equity investments. Low foreign exchange we recognized in the first quarter 2019 due to the exchange rate fluctuation, as well as increased interest expenses associated with our financing activities.

Loss before income taxes was RMB1.8 billion , compared with a loss of RMB396.2 million in the same period last year.

Income tax expense was RMB7.4 million, compared to the income tax expenses of RMB0.5 million during the same period in year 2018. Net loss attributable to iQIYI was RMB1.8 billion , compared with a loss of RMB395.7 million during the same period of year 2018. Diluted net loss attributable to iQIYI per ADS was RMB2.52 .

As of March 31st, 2019, the Company had cash, cash equivalents, restricted cash and short-term investments of RMB17.9 billion . In March 2019, we closed offering of USD1.2 billion in aggregate principal amount of convertible senior notes. Turning to the second quarter 2019 guidance, we expect total revenue to be between RMB6.91 billion to RMB7.29 billion , representing a increase of 12% to 18% year-over-year. This forecast reflects iQIYI's current preliminary view subject to change.

This concludes our prepared remarks. I'll now turn the floor to the operator and open the Q&A.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Ella Ji from China Renaissance. Please go ahead.

Ella Ji -- China Renaissance -- Analyst

Thank you for taking my questions. My first question is regarding your content cost in the first quarter. It was a nice surprise, it's down almost 20% sequentially. So, can you talk about your content cost to trend, is this something one-off or should we expect to see your content cost continue to trend down in the coming quarters? And then also relating to the content, this year it's quite an important year, there are a lot of anniversaries for our political events, so relating to that, can you just give us an update of the regulation approval, is it -- is there any change that you are seeing? And how should we think about the impact on your revenue and cost respectively. Thank you.

Yu Gong -- Founder, Chief Executive Officer and Director

(foreign language)

Dahlia Wei -- Investor Relations Director

So for your question, the main -- major event for the coming -- cost coming down in this quarter is primarily due to delay of some certain of our content. The delay is related to several reasons, one could be the policy changes and regulatory measures, but more I think in relation, there is something related to the process of our content production. And talking about regulation side, I think that overall this year will be larger, stable compared to the level of last year, but entering to Q2 and Q3 and that there will be some anniversaries fall of (inaudible). So Q2 and Q3 will be a little bit stricter than before. Thank you, Ella.

Operator

Thank you. Your next question comes from the line of Alicia Yap from Citigroup. Please ask your question.

Alicia Yap -- Citigroup -- Analyst

Thank you. Good morning. (foreign language) Thanks for taking my questions. I have a question on your second quarter guidance, if the suspicion remain solid, it would suggest that the advertising revenue will face quite meaningful year-over-year and sequential decline, is that the correct assumption. And could you help us understand the dynamics and the shift of the landscape. So what are you seeing now from the ad demand versus three months ago in February when you report 4Q result, was that a change of the advertiser tone to be even more cautious than you are seeing in the beginning of the year. Thank you.

Xiaodong Wang -- iQIYI -- Chief Financial Officer

Alicia, yes you're right, we're more cautious about advertising revenue in the second quarter as I explained before. We had expense -- the increased ad return recovery could be done like three weeks last year, but unfortunately, it seemed to take longer time to get it to the normal level, so which means we will have some challenge on the ad side. And really a big challenge on the ad revenue side. But back to the membership surveys, I think we can still make a like see a bit of a long term positive trend of the membership business. Certainly, Dr. Gong just introduced due to some delay of the content, we'll have some impact on the subscriber business also as well as the online advertising service, but in general speaking, we still have confidence on the membership service. Thank you.

Operator

Thank you. Your next question comes from the line of Binnie Wong from HSBC. Please ask your question.

Binnie Wong -- HSBC -- Analyst

(foreign language) I have two questions here, one is that in terms of your strong total subscriber growth here, in the past quarter, industry subs growth have been going very good. And now this quarter it seems that the competitors has been participating in subgrowth. How do we see the competitive landscape going forward? And how do you see that, you still have some gaining growing the market share in your total sub, despite that probably toward like the end of the year where you can have a better, stronger pipeline, but then this quarter despite not very strong yet but we still have a very, very good growth in our subgrowth. Your strategy you think we have been doing much better than our competitor this quarter. And then second is that, what is your sense in terms of second half in terms of advertising growth that you think second half besides is a easy comp in our advertising revenue, you still see a potential better drivers in our company in advertising or maybe the industry, how do you see has been turning better if you give us confidence into the rest of the year? Thank you so much.

Yu Gong -- Founder, Chief Executive Officer and Director

(foreign language)

Xiaodong Wang -- iQIYI -- Chief Financial Officer

Back to your second question.

Dahlia Wei -- Investor Relations Director

Okay. For the subscriber growth, yes, you are correct, we outperformed our peers in terms of subscriber growth in the first quarter. I think that's mostly attributable to a very strong original content we offered in the first quarter, especially some serial, drama series we launched. And also some variety shows we produced originally such as Idol Producer, they all contributed to the strong growth. And I'm quite confident that this trend will continue into the rest of the year because our pipeline, as you mentioned, is quite strong in the second half. So, on the content side, we are quite confident. But secondly, our outlook there is something related to scheduling the content, how to balance the mix of what kind of content to be aired and also benchmarking to what our peers or other companies are offering on that platform. So it's overall strategy to scheduling the content launch schedule. But overall, I think we are quite confident and something I wouldn't elaborate it, we although have some initial -- operational initiatives and marketing efforts on the sidelines.

Xiaodong Wang -- iQIYI -- Chief Financial Officer

This is Xiaodong, I will answer your second question. Actually, one of the very important reason why we see a very weak performance on the ad business is relatively we have a high base last year. So, entering to the third quarter and the fourth quarter, that won't be that usual, it's more like to some extent more apple-to-apple comparison for the year-over-year growth. So I believe you will see that kind of like a deterioration on the year-over-year growth coming to the second half of the year. But however, as I just said, we remain very cautious on the forecast of the entire advertising business in the next few quarters or even next full-year because of the relatively mix and macro environment. Thank you.

Operator

Thank you. Your next question comes from the line of Piyush Mubayi from Goldman Sachs. Please go ahead.

Piyush Mubayi -- Goldman Sachs -- Analyst

Thank you for taking my question. I have two related questions with advertising. The first is, do you think in the longer-term, your advertising business and your subscription business can run simultaneously or do you think that success in the subscription business would mean that the advertising business would be a very different business from the sort of numbers we saw in 2018? The second is, if you could dissect the advertising business between the performance brand advertising, as well as the accounts, the major verticals that you're seeing and how each of those verticals are performing, that would be great. Thanks.

Xiaodong Wang -- iQIYI -- Chief Financial Officer

Piyush, can you repeat the second question? We kind of lost you for the second part.

Piyush Mubayi -- Goldman Sachs -- Analyst

Could you dissect the advertising business performance in the first quarter, what you've seen so far that has led you to a more bearish view on the advertising business in the second quarter. And a general cautious commentary around advertising for the next one year? Could you break it down between the different components and drivers of advertising business? Thank you.

Yu Gong -- Founder, Chief Executive Officer and Director

(foreign language)

Dahlia Wei -- Investor Relations Director

To answer the question, I think we are -- we have three major revenue pillars for the Company. The first one is membership business, which performed quite well in the first quarter and we continue to see the paying habit is forming for Chinese users and their willingness to pay is getting better than before. And second revenue source is advertising as you add, I think there are two factors impacted our advertising revenue. One is, as we mentioned, there is some content delay in this quarter and also there will be some further delay probably in Q2 and Q3 as well, that will definitely impact our brand advertising.

And also another is, as everybody knows, there is some softness in our macro environment. As a result, certain advertising verticals, the lower -- your advertising budget and that's another impact. And in advertising business, we also have in-feed advertising and we did some cleanup starting later half of last year, so that that's another drag on the revenue side. And in addition, because on the inventory -- ad inventory side, the overall inventory is coming up from all over the industry, but on the other hand the demand is not so upbeat, as a result the CPM level is on a downward trend. But I believe in the second half and in Q2, Q3, I think the industry will eventually warming up and CPM can returning trends to a normal level.

And I also want to mention the third driver for our business, which is other business. Other business contain lot of IP directed revenues, including games and other actually related revenues, which can be potentially a long-term driver for us.

Yu Gong -- Founder, Chief Executive Officer and Director

(foreign language)

Dahlia Wei -- Investor Relations Director

I also want to add some commentary on the management of our business. For our membership business, I think seasonality wise, Q3 is the strongest demand from our users and followed by Q4, Q1, Q2 -- Q2 being the weakest. And also there's another factor, which is supply of content. The content was determined by content procurement, content production, as well as the schedule of regulatory censorship of the content. So that schedule might not perfectly match the demand pattern of the user need. And also for our advertising business, there is also a seasonality pattern, which is a little bit different than the membership, typically in Q2 and Q3 stronger quarter in the year and Q4, Q1, probably Q1 in the weakest.

Xiaodong Wang -- iQIYI -- Chief Financial Officer

Okay. Piyush, if you want more details about our title surveys, we can talk later during our conference. Thank you.

Operator

Thank you. Your next question comes from the line of Ribery Gu from Credit Suisse. Please go ahead.

Ribery Gu -- Credit Suisse -- Analyst

Good morning management. Thanks for taking my question. I have a follow-up question on the subscription growth, as the subscriber has already reached around 100 million level, I just want to understand the next step for a growing strategy for our subscription. I understand that our major focus will still be the content, but at the same time will the management also focus on, like the upgrades for the subscription model or anything like the further cooperation like we did with JD before. Thanks.

Yu Gong -- Founder, Chief Executive Officer and Director

(foreign language)

Dahlia Wei -- Investor Relations Director

Yes, you're correct that exclusive content is the most important driver in our subscription growth, especially the original high quality content, because the licensed content most of that is not exclusive. So the exclusive content really mainly comes from our original pipelines, especially drama series and to a lesser extent, variety shows and movies, but mostly drama series. And in addition, yes, we have some operational initiatives like a gen membership with certain partners like JD and some other Internet services. And we also do some attractive marketing and promotion, but compared to content, those are not so meaningful drivers.

Yu Gong -- Founder, Chief Executive Officer and Director

(foreign language)

Dahlia Wei -- Investor Relations Director

On the long-term, compared to Netflix, our model is a bit different because we have both free users and paying users. And now our efforts mainly focused on convert those free users into paying users. And now on average basis, our paying users pay approximately eight months during 12 month period. And compared to several years ago, that number is only four months. And so we will continue to offer more and more high quality content to drive those users to accompany us on a longer period of time. So as a result, at each time, we reported the quarter end number, that number will continue to grow.

Xiaodong Wang -- iQIYI -- Chief Financial Officer

Thank you.

Operator

Thank you. Your next question comes from the line of Karen Chan from Jefferies. Please go ahead.

Karen Chan -- Jefferies -- Analyst

(foreign language) My first question is related to the paying subscribers. So given some of the scheduled delay in our dramas, how should we think about the full-year paying subscriber target? And secondly, on content cost, can you provide us a rough breakdown between license and self-produced content this quarter? And how should we think about full-year content cost budget. And any more color on how license content procurement cost has been trending in the industry? That would be great. Thank you very much.

Yu Gong -- Founder, Chief Executive Officer and Director

(foreign language)

Dahlia Wei -- Investor Relations Director

The first question, yes, we -- our target does not change, we still remained net addition target with that earlier in the year.

Xiaodong Wang -- iQIYI -- Chief Financial Officer

We just told before about something like mix of content cost and balance mix contributing 4G content one of the largest content, I think it's familiar that because you won't change the number like in one or two quarters. As I said before, it will be a long-term target. So basically, a opportunity in terms of 20% and if you are talking about online say from -- we did expect, but they're expecting all (inaudible) what I can tell you the number is little bit big or then from now. Thank you.

Operator

Thank you. Your next question comes from Tian Hou from TH Capital. Please ask your question.

Tian Hou -- TH Capital -- Analyst

Yeah. Thank you for taking my question. So, last earnings call, I remember, you guys gave the guidance for the paying members for the full-year. I wonder if there's a new guidance for the paying members on a full year basis. The second one is regarding the content cost, so what's the trend of the content cost for the full-year? That's the second question.

Yu Gong -- Founder, Chief Executive Officer and Director

(foreign language)

Dahlia Wei -- Investor Relations Director

Our full-year guidance for the membership growth doesn't change, maybe because of the content delay I just mentioned earlier, this target become challenging, but we would like to maintain this target for the full-year growth.

Xiaodong Wang -- iQIYI -- Chief Financial Officer

As I said before, this year, content cost our target is (technical difficulty) 70% of revenue, I think the target remains the same.

Dahlia Wei -- Investor Relations Director

Thank you. Next question please.

Operator

Thank you. Your next question comes from the line of Yanyan Xiao from Citic Securities. Please ask your question.

Yanyan Xiao -- Citic Securities -- Analyst

Hello, thank you. My question is about a drop in recent drama (foreign language). So can you share us more details about this drama and like the performing numbers right now or the projection numbers. And also how does the numbers compared to previously hit show like (foreign language). And how does this drama will influence your second quarter results? Thank you.

Yu Gong -- Founder, Chief Executive Officer and Director

(foreign language)

Dahlia Wei -- Investor Relations Director

Yes, The Thunder is a very good show and very good quality drama series. It's a 48 episode long series and now it's in the 20th episode now. I think according to our AI system, we have a forecast system that will be -- we forecast that this show airing and viewership behavior numbers will be better than in the name of the people, but compared to the Yanxi Palace might not be that level, because that's the most important show and best performing show in the history of the video platform.

Xiaodong Wang -- iQIYI -- Chief Financial Officer

Yeah, this is Xiaodong. If you're talking about the impact on the revenue side, I can tell you actually those revenue for not single drama catalyst, we have like the material impact on the revenue side because for most of the drama series, the original content tend to have more impact on long royalty cost, most of the revenue contribution from the membership surveys which will not have like significant difference within a quarter. Thank you.

Operator

Thank you. (Operator Instructions) Your next question comes from the line of Elinor Leung from CLSA. Thank you, please go ahead.

Elinor Leung -- CLSA -- Analyst

Hi, thank you for taking my question. Can you talk a little bit more regarding the content regulation, what type of content has to be delayed? And also how long will be delayed? Is there any risk that we have to write-off these content in the future? And have we changed our content strategy not to cope with the new regulatory environment.

Xiaodong Wang -- iQIYI -- Chief Financial Officer

Okay, this is Xiaodong. Actually, we talked about regulation before, the spend to your guide and actually this very, very seldom case, which were actually like the achievable content or titles, most time is simply delayed because of longer processing time. We need longer time to get approval from authority. So basically, I don't think there will be any risk on the -- like the financial side, which require us write-off certain content from bulk. So basically, it will take us longer time and more effort to get approval, I think it's not regarding to a certain category of the content which like forbidden or whatever restricted from the authority, it's more like a more starter and (inaudible). Thank you.

Operator

Thank you. Your next question comes from the line of James Lee from Mizuho Securities. Please ask your question.

James Lee -- Mizuho Securities -- Analyst

Thanks for taking my questions. And maybe one more clarification on the regulatory side, is your assumption to -- are you planning, based on your assumption, are you planning to launch any new drama series in 2Q and 3Q? Just curious what you're thinking there given the line of sight you can see on the regulatory side? And on the same front, are you expecting to add any subscribers in 2Q and 3Q? And is it fair to assume if you launch fewer content out there, we will also see the churn rate go up as well. Thanks.

Xiaodong Wang -- iQIYI -- Chief Financial Officer

I think in the short-term probably like one quarter or several months, we are going to see some impact on the -- in releasing the content we produced or purchase. But generally speaking, we do believe people will do the job right. So gradually you will see less and less impact in the long run, maybe probably third quarter, fourth quarter, there will be some impact, but we don't see like the significant impact on the business side. Thank you.

Operator

Thank you. Our last question comes from the line of Wendy Huang from Macquarie. Please ask your question.

Wendy Huang -- Macquarie -- Analyst

Thank you. (foreign language) I will just briefly translate. Firstly, the follow-up on the accounting treatment on those delayed TV drama, if those TV dramas never get broadcast in the end, how will you actually deal with this from an accounting perspective where you need to actually write it off? And also what's your content procurement plan this year, i.e., how should we actually expect the common cost increase in 2020. Lastly, what's your plan to actually beef up your in-house production capability? How many number of the in-house studios do you have? Do you have any plans to acquire any good studios from market? Thank you.

Xiaodong Wang -- iQIYI -- Chief Financial Officer

This is Xiaodong, I will ask Gong Yu first two questions and let comment on the third one. And so first I will just explain, it never happened before and with the response we have in the near future, like it doesn't kind of -- get full unreleased forever something like that which never happened before. We do believe it will not happen in the near future. And even less expectedly we assume that something happened, something bad happened, most of the content are licensed content in our hope. So for licensed content, if it cannot go through the approval process, we do not need to pay for it.

So basically, there's nothing like write-off. So, for original content, there is only a very small percentage of the total content cost for now. And even that and I seriously thought we will see like a big impact on the book, because for most of the original content, it's a bit more like the, you understand the guidance before you launch a program for original content, there is even less than licensed content because we choose wisely what kind of type of content we should produce and the way we communicate with authority, our brand, that's how it works basically.

And I will pass over to Dr. Gong Yu to answer your third question.

Yu Gong -- Founder, Chief Executive Officer and Director

(foreign language)

Dahlia Wei -- Investor Relations Director

We have two types of original content, the first one is internal studio, which the content comes from the in-house. We are funding directors and actors, actress actually and also certain element to the external production team. This mostly applies to our variety show category like Idol Producer and those variety shows. And for drama series, some audio studio, the pattern is the script slate and it's time to the project, then the production process to external partner, but some newly established new studios, they have their own production capability and they will be producing their own original content and those content will gradually come up in later half of this year.

Xiaodong Wang -- iQIYI -- Chief Financial Officer

Thank you.

Operator

Thank you. That's all the time we have for questions today. I'll now hand the conference back to today's presenters for the closing remarks. Please continue.

Dahlia Wei -- Investor Relations Director

Thank you all for participating in today's call. If you have any additional questions, please feel free to contact us. Thank you.

Xiaodong Wang -- iQIYI -- Chief Financial Officer

Thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

Duration: 60 minutes

Call participants:

Dahlia Wei -- Investor Relations Director

Yu Gong -- Founder, Chief Executive Officer and Director

Xiaodong Wang -- iQIYI -- Chief Financial Officer

Ella Ji -- China Renaissance -- Analyst

Alicia Yap -- Citigroup -- Analyst

Binnie Wong -- HSBC -- Analyst

Piyush Mubayi -- Goldman Sachs -- Analyst

Ribery Gu -- Credit Suisse -- Analyst

Karen Chan -- Jefferies -- Analyst

Tian Hou -- TH Capital -- Analyst

Yanyan Xiao -- Citic Securities -- Analyst

Elinor Leung -- CLSA -- Analyst

James Lee -- Mizuho Securities -- Analyst

Wendy Huang -- Macquarie -- Analyst

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