iQIYI divulges SEC probe; IQ and Baidu shares tumble after their Q2 earnings announcement

iQIYI (NASDAQ: IQ), a video unit of Chinese search giant Baidu (NASDAQ: BIDU), reported second quarter 2020 results on Thursday. As the Chinese Netflix revealed that the US regulatory body SEC is probing the company on the complaints raised by Wolfpack, shares of iQIYI and Baidu plunged 11.16% and 6.29%, respectively, on Friday.

Q2 results

Net loss attributable to iQIYI narrowed to RMB1.4 billion (US$204.1 million) or RMB1.96 (US$0.28) per ADS in the second quarter from net loss attributable to iQIYI of RMB2.3 billion or RMB3.22 per ADS in the prior year quarter. Revenue increased 4% year-over-year to RMB7.4 billion (US$1 billion).

Membership revenues grew by 19% year-over-year, while online advertising services revenue declined by 285, due to the challenging macroeconomic environment in China. Total subscribing members grew 4% to 104.9 million. However, comparing the previous quarters, this was the first time subscriber growth came in single-digit percentage.

Impact of pandemic

COVID-19 was the most influential factor to iQIYI in the first half of this year. Subscribers MAU and user time spent, all peaked during the first quarter because of home confinement. With pandemic gradually being controlled in Q2 earlier than most of the other countries, people went back to work, and students in China started to study online and prepare for critical exams. As a result, iQIYI witnessed a decline in both people’s video-view time and frequency in Q2.

The pandemic also influenced the content supply for iQIYI. Due to the shutdown of cinemas, no new movies were released offline. Online video platforms also faced supply shortage and the production of variety shows got affected in this period.

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The company expects the slower growth in the second quarter membership is temporary as the subscribers are already rebounding from the end of June. With the content service getting better, iQIYI expects the new users to stay in or come back later to its platform.

Softer ad revenue

The advertising business continued to be soft in the second quarter due to the advertisers’ budget cut, traffic decline after people went back to normal life and some variety show production delays. Ad revenue grew slightly compared to the first quarter and the average customer spending also improved sequentially.

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SEC investigation

iQIYI revealed that SEC’s Division of Enforcement is seeking the production of certain financial and operating records dating from January 1, 2018, as well as documents related to certain acquisitions and investments that were identified in a report issued by short-seller firm Wolfpack Research in April 2020. iQIYI had already arranged for an internal review immediately after Wolfpack’s accusation. Wolfpark alleged that the company had magnified its 2019 revenue by 27-44% and overstated its subscriber numbers by 42-60%.

Regarding the internal review on the SEC’s queries, CFO Xiaodong Wang said,

“It’s internal, independent internal review. So we don’t know exactly the result and the status right now. What I can tell you is, the voluntary disclosure of this investigation itself actually show the confidence of the management on the potential result of this internal review. And we do believe due to the solid and disciplined internal control process and the corporate governance we built in the past 10 years. And together with the corporate culture we’re promoting in the company, we do believe the results will be quite positive to the company.”

Stock movement

The divulgence of SEC investigation made the IQ stock to tumble 11% on Friday. As a consequence, iQIYI’s parent Baidu, which also reported its Q2 results on Thursday dropped by 6% on Friday. IQ stock had declined 9% on NASDAQ since the beginning of this year.

Read the entire transcript of iQIYI Q2 2020 Earnings Call