Phoenix New Media Limited (FENG) Q1 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Phoenix New Media First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, May 13, 2015. I’d now like to hand the conference over to your first speaker today, IR Director of Phoenix New Media, Mr. Matthew Zhao. Thank you. Please go ahead, sir.

Thank you, operator, and thank you and welcome to Phoenix New Media first quarter 2015 earnings conference call. I am joined here by our Chief Executive Officer, Mr. Shuang Liu; our President, Mr. Ya Li; and Chief Financial Officer, Ms. Betty Ho. For today's agenda, management will provide us with a review on the quarter and also include a Q&A session after the management's prepared remarks. The first quarter 2015 financial results and webcast of this conference call are available at Investor Relations sections of www.ifeng.com. A replay of the call will be available on the website in a few hours. Before we continue, I refer you to our Safe Harbor Statement in our earnings press release, which applies to this call as we will make forward-looking statements. Finally, please note that, until otherwise stated, all figures mentioned during this conference call are in renminbi. With that, I would like to turn the call over to Mr. Liu Shuang, our CEO.

Thank you, Matthew. Good morning, and good evening, everyone. The first quarter marked the continuing evolution of our company as an integrated news and information gateway in China. Despite the seasonal impact on advertising revenues associated with the late Chinese New Year, the temporary volatility due to the transition of our sales executive and our increased investments on mobile internet, we made solid operational progress, which will lay the groundwork for long-term user growth and business expansion. The core competencies of our business, namely content production capability, dedication to serious journalism and cutting-edge technology remain unquestionably strong. We are confident that with these strong fundamentals, the ongoing technical evolution of content recommendation of mobile and integration with Yidian, we are well positioned to capitalize on emerging opportunities in China's mobile internet industry. Now, let's start with the long-term strategic direction of the company and how Yidian plays a vital role in this strategy. Ever since our inception, we differentiated ourselves from the portals by opting to produce high-quality original content and develop vertical information offerings for our users. In recent years, facing trends of fragmented information consumption in the mobile age with advanced home force into the mobile internet world by diversifying our content and enhancing our products in anticipation of mobile user demands. We rely on two key pillars of our business to achieve this goal. First, our news app focused on professional journalism and proprietary news contents. We believe that the ifeng news app is one of the most ideal and efficient platforms for user to consume the latest current affairs and other timely news coverage, especially when compared with the fragmented information available over the social media and other platforms. The rapid growth of our mobile user base has proven its popularity. Together with our mobile websites, the number of daily active users on mobile grew 25% year-over-year to 33 million in the past quarter. Meanwhile, we also noticed that there is a dynamic unfulfilled reading demand among users to explore and discover diverse web content based on their interests during this period [ph]. Yidian owns a proprietary interest engine which combines search and personalized recommended technologies. By bridging these two key functions, Yidian delivers customized internet content to each individual users. Through the ifeng news app and Yidian, we redefine how users find and consume information anytime, anywhere and on any internet-enabled device. In addition, supported by our other products such as ifeng video app, ifeng FM app and our mobile websites, ifeng's goal is to leverage the strengths and synergies of ifeng news and Yidian to become the next generation information gateway in the mobile internet era. Yidian technology is a product of years of focus on developing data analytics and refining search and recommendation solution for mobile information consumption, which is more precise and valuable to users. Yidian offers a diverse selection of around two million interest channels for users to choose from, by either switching or subscribing. By tracking the act of selecting channels and exploring news topics on the part of users, Yidian use personalized profiles for each user, and accordingly, push them contend based on their demonstrated interests. Furthermore, the synergies between Yidian and ifeng’s other news quarters [ph] are undeniable as they serve different markets and other different user experiences, while benefiting from proving resources and bringing our large respective user base. Currently Yidian has over 10 million daily active users. Keep in mind, Yidian not only is present as our technology pillar but also promotes our overall user base. It greatly expands the audience for our in-house journalistic content and merger information offerings and allows access to Xiaomi's massive and rapidly growing market of smartphone users through pre-installations of Yidian. It also allowed us to offer advertisers a more effective product with additional benefit from the greater traffic associated with the user expansion. Lastly, Yidian has opened doors as we explore more e-commerce and also all related business opportunities. Now, I would like to turn the page to our ad revenue business and strategy going forward. We already began to see encouraging signs with many of these emerging advertising solutions, especially after our SVP, Andy Jin, recently assumed responsibility for advertising sales, marketing and branding activities. Mobile ad revenue grew 135% year-over-year in the first quarter, as we successfully integrated our PC and mobile advertising sales team in an effort to consolidate resources and streamline our sales efforts. We see strong potential for accelerating mobile revenue growth in the future, as we grow out targeted ad solutions over Yidian in the second half of this year. Yidian’s bank of user data and targeting technology, allow us to work with advertisers to develop ad campaigns that are more relevant and manageable. The acceleration of new advertiser growth is another key thing in 2015. ifeng’s premium brand and competitive price have made us more attractive to brand advertisers compared with other traditional media websites. As a next step, we will focus on building our base of small and medium-sized enterprise clients by offering programmatic buying advertisement solutions, recognizing that advertises, regardless of platform, has increasingly desirable definition for their marketing activities. We raised the pricing for the majority of our A and A-plus inventory categories early this year, and will consider further price increase in the future, based on market demand. Furthermore, we continued to see significant progress on native marketing ever since it was launched a year ago. In the recent quarter, we developed a series of new highly effective native advertising programs, which all vastly exceeded expectations in terms of effectiveness, audience reach and interactivity. We'll continue to cooperate with our advertising partners, large multimillion RMB level native marketing campaigns across various industries, such as auto, energy, finance and e-commerce. We are also pleased with the broad-based growth across our vertical offerings. According to iResearch, in the past quarter, we ranked number one in news, fashion and real estate channels. We also completed the business unit restructuring of our finance vertical to provide more flexibility for the future development of our verticals. The enhancement of our finance vertical and the enrichment of a finance-related video program alongside the expansion of our social and social media public accounts and high-end summit organizations [ph] characterized our strategy of offering more finance-related content and all services overall platform. Through expanding the VAS quality and quantity of our verticals would further broaden our impact of users and enhance our premium content offers. All in all, going forward, we are focused on improving our operational capabilities through growing our advertising clients and developing emerging ad solutions, as we execute around our long-term strategy of building the most useful and international platform information consumption in China’s mobile internet world. With this, I'd like to turn it over to our CFO, Betty Ho.

Thank you, Shuang, and thank you all for joining our conference call today. ifeng's total revenue for the first quarter came in at RMB 365.1 million, mainly driven by the advertising sales, with a year-over-year growth of 14.2%. Adjusted net income attributable to Phoenix New Media for the first quarter was RMB 23.6 million, and non-GAAP net income per diluted ADS was RMB 0.32. Now let me take you through our financial highlights for the first quarter of 2015 results. The amounts mentioned here are all in RMB, unless otherwise noted. The differences between GAAP and non-GAAP are the adjustments of the share-based compensation, gain on disposition of subsidiaries and acquisition of equity investments and loss from equity investments. Starting with revenues. Net advertising revenues for the first quarter came in at RMB 268.4 million, which represents a year-over-year growth of 14.2%. It was mainly driven by the robust year-over-year growth in mobile advertising revenue of 135.2%. Average revenue per advertiser or ARPA increased by 13.4% to RMB 1.1 million, and the number of advertisers increased to 255. Looking ahead, we expect some short-term volatility in terms of the ad sales during the second quarter of this year, mainly due to the transition of the sales executive. However, we are confident that the ad sales will rebound in the second half of 2015 and our net ad sales growth for the full-year will be in line with the industry growth. Paid services revenues for the first quarter was RMB 96.7 million, which represents a year-over-year decrease of 20.9%. The decrease was due to the fact that we have trimmed the digital reading and mobile video businesses through telecom operators, as a result of the change of revenue sharing scheme. Games and others revenues decreased by 8.4% to RMB 22 million. It was due to the decrease in revenues generated from web-based games on the company's game platform, as well as the lower-than-expected revenues generated from the mobile games. Secondly, gross profit and margins. Adjusted gross profit for the first quarter was RMB 180 million compared to RMB 186.2 million in the same period last year. Adjusted gross margin for the first quarter was 49.3% compared to 52.1% in the same period last year. In terms of cost of revenues, adjusted content and operational cost as a percentage of total revenues increased to 23.5% from 19.9%, mainly due to the increase in staff-related costs and advertisement-related content production costs. Revenue-sharing fees as a percentage of total revenues decreased to 14.1% from 15%, primarily due to a decrease in MVAS revenues. Bandwidth cost as a percentage of revenues remained stable at about 5.9%. And lastly, sales tax and surcharges as a percentage of revenues remained stable at about 7.2%. Thirdly, adjusted operating expenses for the first quarter, increased by 19.6%, to RMB 158.2 million, from RMB 132.3 million in the same period last year. The increase in operating expenses was primarily attributable to the increase in stock-related expenses and expenses associated with the company’s marketing and promotional initiatives. Adjusted operating income for the first quarter was RMB 21.7 million compared to RMB 54 million in the same quarter last year. Adjusted operating margin for the first quarter was 6% compared to 15.1% in the same period last year, mainly due to the decrease in paid service revenues, seasonal impact on advertising revenues associated with the late Chinese New Year, the transition of the sales executive and the increase in staff-related costs. Fourthly, adjusted net income attributable to ifeng for the first quarter was RMB 23.6 million compared to RMB 56.9 million in the same period last year. GAAP net loss attributable to ifeng for the first quarter was RMB 11.2 million compared to a net income of RMB 52.2 million in the same period last year. The difference between GAAP and adjusted net income attributable to ifeng was mainly due to the significant increase in a non-operating item loss from equity investments of about RMB 20 million compared to RMB 1.5 million in the same period last year and the decrease in another non-operating item, gain on disposition of subsidiaries and acquisition of equity investments for the first quarter of 2015 was zero compared to RMB 17.7 million in the same period last year. Adjusted net income per diluted ADS for the first quarter was RMB 0.32 compared to RMB 0.73 in the same period last year. In terms of balance sheet items, as of March 31, 2015, ifeng's cash and cash equivalents and term deposits and short-term investments and restricted cash were RMB 1.27 billion or approximately US$204.6 million. Immediately after closing of the last run of the investment in Yidian at the end of April, the company's cash and cash equivalents, term deposits and short-term investments and restricted cash were around RMB 1.06 billion or approximately US$171 million. Lastly, I’d like to provide our business outlook for the second quarter of 2015. We are forecasting total revenues to be between RMB 412 million to RMB 432 million, representing a growth of 0.2% to 5.1% year-over-year. For net advertising revenue, we are forecasting between RMB 322 million and RMB 332 million, representing a growth of 10.7% to 14.1% year-over-year. For paid services, we are forecasting between RMB 90 million and RMB 100 million, representing a decrease of 25% to 16.7%. This concludes the written portion of our call. We are now ready for questions. Please go ahead operator.

Hi, Ya, Shuang, Betty and Matthew. Thank you for taking my questions. My first question is for the advertising revenue. As the advertising revenue missed your previous guidance a little bit and the growth rate declined notably. So, I understand this is because of C&Y [ph] effect. So my question is that, does that also related to some less robust advertising market that you observe since the results for the first quarter, or is there anything worse than your previous expectation? How we can read through the first quarter advertising revenues throughout the whole year kind of top line guidance? And then I have a follow-up. Thanks.

Hi, good morning, Alice. This is Ya. Thanks for the question. First, yes there are two additional courses which made the advertising revenue situation worse than we had communicated during our last conference call. First is the transition of our advertising sales team executive. Our CMO Ms. Jin announced her resignation for personal family reasons and due to this transition of the sales executive, there has been some temporary volatility. And we do see these affecting both Q1 and Q2. However, our new Senior Vice President in-charge of advertising team, Mr. Andy Xu. He was very seasoned advertising professional and we have seen a relatively smooth transition so far. So we are confident that this factor will gradually die out or decrease and in the second half of the year, we will see the comeback of advertising revenue growth. In addition to this factor, there is also decision we made, which made us - deducted almost RMB 100 million advertising revenue, which would have been generated from our planned mobile advertising platform. This is a programmatic buying-related DSP/SSP model for advertising platform. We had planned to develop it ourselves. And it will have very low margin, but it’s important trial or test to cope with the new programmatic buying trend. But later we decided that it's best to work - to partner with the leading platforms instead of develop our own. So that would deduct RMB 100 million in revenue for the whole year. However, it doesn't affect the bottom line, because the margin contribution originally was very low, and it would have been cancelled out - the margin contribution –profit contribution would have been cancelled out by the resources, investment we put into development of this platform. So the sales executive transition and the mobile platform cancellation, these two factors actually affected our overall annual advertising revenue guidance. So right now, we are still looking at industry in line growth for both our PC and mobile revenue. And we do see the overall year advertise revenue to grow at 22% or - around 22% or between 25% to 30%, if we exclude the real estate advertising revenue contribution in 2014. We had mentioned this last time that this year we decided not to include the real estate revenue contribution from one of our subsidiary into our overall revenue. So excluding that factor, we would still see annual revenue growth to be between 25% and 30%.

Understand. To make sure that I understand that clearly, may I repeat that. You said that originally you could have recognized RMB 100 million as revenue from planned mobile platform, but then you cancelled this plans, so that affected overall expectation for advertising revenue in 2015, but the investment has already been made, so that will have some kind of impact on the margin. Is that right?

Not exactly, because it's a gradual process to put investment into this project, and in the first couple of months of this year, we don't see satisfactory results from the initial development. But the initial development cost wasn't that much. So overall it can be ignored. But we do have to deduct the RMB 100 million revenue originally planned.

Understand. Got you. And my follow-up question is about your ad price upgrades. Can you share with us about the percentage price upgrade of your PC and also mobile site, and how is your further price upgrades planned in this year? Thanks.

Okay. In this first half, we increased our PC ad price by - overall by like single-digit for the A-plus category to almost 10%. For video advertising, it was also about 13%. Mobile advertising pricing overall was increased by 20%. And for the A-plus category of the mobile ad inventory, we increased price by 33%. And that's based on our continuous growth on both PC and mobile traffic. In our first quarter, we see the PC DAU grew by 16%, while our mobile asset grew by 25% year-over-year. And we do plan to increase, especially the mobile pricing in the second of this year.

Got you. Thank you very much. I'd better back to the line. Thank you.

The next question comes from the line of Natalie Wu from CICC. Please ask your questions.

Hi. Good morning, management. Thank you for taking my questions I've got a couple of questions. Firstly, housekeeping question. Can you update us the prospectus of the advertisers and its contributions in the first quarter, respectively. And also can you give us some color on the current status of mobile inventory, CPM or CPT level and the trend looking forward? And I will have a quick follow-up.

Okay. Good morning, Natalie. This is Ya. First, your questions regarding advertising sector contribution. The top five sector stay the same as before and it’s - first is auto; and second is e-commerce; third is food, beverage and wine; the fourth is financial service; and the fifth is medical and healthcare services. And the revenue contribution almost the same as before, so we see this as rather stable. And the second question regarding mobile advertising inventory. We have two categories of mobile assets; first is native apps, including news app, ifeng video app and ifeng audio app, the ifeng FM. And for these assets, we do see the sell-through rates relatively higher than the industry average. And however we do see abundant unsold inventory on our mobile ad assets. The mobile ifeng assets has more than 20 million DAUs. And recently, we are improving the user experience and also the advertising products on these mobile websites. So in the future, our sales team can sell these mobile ad app inventory along with similar or the same advertising inventory on products on the native apps. And so we do - overall we see enough mobile ad inventory on our 33 million DAU mobile visitors. And you do have a question - yes.

Hello?

Yes, please.

Yes, and about the CPM and CPT level. Can we see some more quantitative upside on their prospect [ph]?

Yes, I think just quantitatively speaking, for example, for some A-plus categories the full-screen launching screen ad on our mobile native apps will sell it at a higher CPM rate than most of our peers. However, the CPM rate on our mobile websites is around 10 CPM, which has a lot of improvement potential. And on our PC, we sell our A-plus categories at a rate higher than sites like Tencent, but still lower than some of the leading - some of the other portals.

That's very helpful. I have a further question on Yidian. I was wondering, can you share with us the [indiscernible] with Yidian and the monetization plan on this aspect in the [indiscernible].

Okay. Yes, we recently announced that the completion of the investment in Yidian on April 30, and at this time our priority is still to develop and enhance the product and also grow the user base. We are determined to grow Yidian into the top mobile media apps in China. Yidian has been the fastest growing news-related app in 2014. It has reached almost 10 million DAUs overall at this time. So recently we are starting to developing and testing our advertising product also in partnerships with Xiaomi between ifeng and Yidian. And we can provide better targeted apps because of the interest engine, the innovative interest engine of Yidian. We provided our targeted app based on CPD [ph] download or CTC script [ph] or CPS for e-commerce and lottery and CPM for brand advertising and so it's a mixed model of advertising. And we believe that using the interest engine, we can offer interest apps which can deliver superior results and better advertising ROI measurable to many of the marketers. At this time, we do not give any - we do not have any concrete number in terms of advertising revenue prediction. We do see advertising revenue to be generated starting the second half of this year and it should ramp up to large-scale to 2016.

Great. Thank you.

Thank you.

[Operator Instructions] Our next question comes from the line of Binbin Ding from JPMorgan. Please ask your question.

Hi. Good morning, management. Thanks for taking my question. My question is also regarding Yidian. Just wondering if management can share some progress on the monetization initiatives, and you mentioned that Yidian is launching some personalized advertise native ads in the coming quarters. So I’m just trying to understand more about the launching schedule of this product and the detailed ad formats. And also about your sales executive change, I guess, the new CMO, Chief Marketing Office is an expert in native ads. So will the appointment of new CMO will facilitate the monetization of Yidian as well? And how do you structure the monetization of your own native marketing solution and the monetization of Yidian? Thank you.

Okay. Thanks Binbin for the question. This is Ya. First, more details about Yidian advertising launching schedule. At this time, we are in the testing period. We have selected a small percentage of the users to provide targeted ads, and we are working with Xiaomi's advertising platform to deliver these ads to the selected users on android phones. And first Yidian itself provides very critical role for both core content discover of readers and also as a distributor to publishers, through this unique interest engine. The interest in engine enables users to express their interests, I think, more effectively and better than the pure search model or the pure recommendation engine, because when user expressly subscribe to one of the two million channels or query-based [ph] channels, and they indicate their real and true interests, it's not based on a guest recommendation or a one-time search. So I think - we think that model can integrate the users’ interests better and communicate the user profile better to our advertising engine. As we mentioned that also because of the partnership with Xiaomi, so we can provide better advertising solution measurable by - for example CPD, the downloads can be easily measured through the partnership with the hardware manufacturers like Xiaomi. And of course we also provide CPC and CPS model, as well as the CPM model for brand advertising model. ifeng has been very successful in providing brand advertising. And as you mentioned, Andy, who has been leading our native marketing efforts on ifeng, we have accumulated a lot of experience in brand advertising and we are actually helping Yidian building its own advertising sales team, which capable of both, delivering this performance ads as well as the brand advertising solutions. The native stream ads on Yidian is mostly performance-based. The native marketing programs of ifeng is mostly content or brand advertising solutions. However because of the large user scale as its - still expanding user base of Yidian we think that the combination of performance ads with brand ads on Yidian will make Yidian a very successful advertising marketing solution for many companies. And we do hope to provide more detailed information, I think in the second half of this year.

That's helpful. And then also quick follow-up on margins. I think the gross margin came in a bit higher than our previous expectations. So I'm just trying to understand that this trend going forward and alter the operating margin trend? Thank you.

Hi Binbin, this is Betty. In terms of operating margins, actually in this quarter our operating margin came in at about 6%, which is mostly due to seasonality effects and the transition of the sales executive, which may contribute to the revenue but not as we expected. And also for the operating expenses, we have a fixed cost, that's why we the operating margin has shown a temporary lower number. But looking at the full-year, as I stated in our earlier - on our last conference call, that we are looking at our full-year’s operating margins above 2% to 3% lower than the previous year. In 2014, the operating margin was about 17.8%, and this year due to the increased marketing initiatives on the traffic acquisition cost, during the earlier call, we mentioned that it will be around 2% to 3% impact on our operating margin, but we have been adopting a very, very tight cost control. So as a result, I'm an expecting only 1% to 2% impact on our operating margin overall for the full-year of 2015.

Okay. Thank you.

The next question comes from the line of Elaine Ding [ph] from Deutsche Bank. Please ask your question.

Hi, management. This is Elaine [ph]. I have two questions. The first one is regarding the advertising price change plan. Is there any such kind of detailed plan rest of this year, as Ya just mentioned about the mobile price change in the second half. Could you give us more color on this one? And the second is regarding the overall brand advertising budget. What we will see the industry demand this year? What is the trend you say that it's different from before? And also given some peers have already planned to increase extensively their mobile inventory, would you say that your mobile revenue growth momentum is the same given such competition? Thanks.

Hi, Elaine [ph]. Thanks for question. This is Ya. First of all, the ad price change. I think just to clarify, what I mentioned was over the first half price change for our PC, video and mobile. And all of those three categories, mobile grew the most. In the second half, yes, we do plan to have further price increase, especially on the mobile. And I did mention that we are in the process of developing better mobile WAP product, as well as mobile WAP ad solutions on that mobile WAP product. In addition, as we continue to grow our ifeng news app through increased investment in marketing, especially pre-installation with leading handsets manufacturers, we do see the capacity to increase, especially in mobile price in the second half of the year. But at this time, we do not have a detailed plan. And your second question regarding the overall advertising demand. At this time, we do not see any overall change, except for the first quarter of course, the late Chinese New Year did have some impact on some of our clients in delaying their advertising budget decisions. And one trend we do observe is the continuous migration or fastest growth on mobile advertising. So that's why we see 135% growth in the first quarter for our mobile ad revenue, and relatively flat for our PC. In the second half, I think also due to the transition cost uncertainty, we see our mobile ad revenue growth to be in line with the industry average. And also the Yidian’s impact of mobile ad revenue will not be identified until much later this year. I don't know if that answers your question.

Yes. That's helpful. Thank you.

Thank you.

[Operator Instructions] If there are no further questions, I'll hand your conference back to your speaker for any closing remarks.

Thank you, operator. We have come to the end of our Q&A session and our conference call. Please feel free to contact us if you have any further questions. Thank you for joining us on this call. Have a good day.

Thank you very much. Ladies and gentlemen, that does conclude our conference for today. Thank you so much for your attendance. You may all disconnect.