Phoenix New Media Limited (FENG) Q1 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Phoenix New Media First Quarter 2016 Earnings Conference Call. I must advise you that this conference is being recorded today, Tuesday, May 10, 2016. I would now like to hand the conference over to your first speaker today, the 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 2016 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 2016 financial results and the webcast of this conference call are available at the Investor Relations section at 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 unless 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 the Company as an integrated mobile news and information gateway in China. We are very glad that our mobile ad revenue grew by 115.3% year over year. However, as many of you are aware, the macro environment remains challenging for us as it does for many others in the industry, and we expect the trend to continue to put downward pressure on our top line growth in the near future. But the strong mobile performance will help to counteract macro headwinds in future periods as we continue to shift our focus and resources to mobile media delivery. In order to fully capitalize on this mobile opportunity, we are continuing to streamline our content and marketing resources across mobile and PC platforms and focusing these combined teams on developing and expanding the content and advertising solutions for the mobile platform. By allowing our editorial talent who represent our core DNA to operate more efficiently and to collaborate more openly, we will be able to offer more seamless, organized, and comprehensive mobile content to our loyal users across all devices. We are currently integrating our content focused talent and resources on the mobile end. This includes featured news, opinion polls, editorial self-media, and user generated content which previously was mainly available on the PC platform. Furthermore, by shifting additional focus towards mobile, we can increase the library of content available on our ifeng News application and enhance its suitability for mobile users. Our shift towards mobile represents the Board's strategy to not only increase the content available, but also to utilize location services, user profiling, and broadcasting capabilities to enhance the overall experience. To illustrate, we have already begun to offer local content to users of the ifeng News app based on their location and provide them tailored news feeds based on their profiles. We also improved our live broadcasting services to offer on-the-spot news reports. Our users have responded well to these enhancements as evidenced by iResearch monitoring data that the ifeng News platform as the stickiest among its news application peers in terms of average daily time spent per user in March. Our mobile strategy stretches beyond ifeng News. It is a comprehensive strategy to both elevate the profile of our journalistic content abilities and place us at the forefront of the technical innovation which drives the pervasion [ph] of information. Another major application of ours, Yidian is key to the technical component of this strategy. As you likely already know, Yidian is an interest-based news and information app which pushes content to users based not only on their selected interests, but also on their exhibited preferences. In recent quarters, we have continued to refine the algorithm that supports this personalized push and added new features such as localizations and subscription services. In terms of content, we have seen strong performance of short review on the formal side and self-media on the publisher category side. Recognizing the appeal of this content to our users, we are working to better cultivate our ecosystem friendly to video content developers and self-media publishers. Owing to these continuous improvements, Yidian saw its number of average daily active users reach 25 million in April 2016. Last quarter, I spoke about the solid progress of our finance verticals and now would like to share with you some exciting developments within the fashion verticals. Last quarter, we launched a new product called Xhijong [ph] to help our female users select dresses based on expert commentators and analysis of celebrity's trends and styles. Xhijong [ph] characterizes our strategy of leveraging the power of our vertical offerings to engage users and get closer to the end transaction. Just as we highlighted last quarter with the success of our financial products embedded in our finance vertical, the overall expanded content, better integration, greater mobility, enhanced personalization, deeper verticalization, and effective localization equals strong value added for users that will fuel the growth of our user base and increase the stickiness of our platform. By the same token, it also offers great value to advertisers keen to benefit from the rise of mobile, video, and big data. However, this value to advertisers remains largely untapped as we are still in the midst of focusing our advertising solutions on the mobile platform and utilizing big data to help advertisers more effectively zero in on their target audiences. We will accelerate the introduction of innovative advertising solutions of ifeng News and Yidian mobile apps and expect to eventually see a sustainable rebound in ad revenues. To conclude, we are deliberately focusing our Company on the high potential mobile platform and are well positioned to capitalize on the growing demand for high quality original content, greater mobility, and individual personalization. By structuring and focusing our organization in this direction, we aim to further improve our long-term performance and capitalize on growth opportunities that exist at the intersection of cutting edge mobile technology and high quality journalism. We highly value our investors' loyal support as we navigate this industry downturn and confidently execute our strategic and opportunistic growth initiatives. 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. As Shuang mentioned earlier, we are very excited to have exceeded our guidance for the quarter. ifeng's total revenue for the first quarter came in at RMB322.9 million, driven by the mobile advertising sales with a year-on-year growth of 115.3%. Non-GAAP net income attributable to Phoenix New Media for the first quarter was RMB14.7 million or RMB0.2 non-GAAP net income per diluted ADS. Now let me take you through our financial highlights for the first quarter of 2016 results. The amounts mentioned here are all in RMB unless otherwise noted. The differences between GAAP and non-GAAP are non-operating items, which are share-based compensation and loss/gain from equity investments including impairments. Starting with revenue, net advertising revenue for the first quarter, came in at RMB271.4 million which represents a year-over-year growth of 1.1%. It was mainly due to the increase of mobile advertising sales at 115.3% year over year, which was partially offset by the decrease in PC advertising revenues. Paid services revenue for the first quarter was RMB51.6 million which represents a year-over-year decrease of 46.7% which was in line with our expectations. MVAS revenues decreased by 51% to RMB29.1 million resulting from the decrease in user demand. Games and others revenues increased by 2.3% to RMB22.5 million primarily due to the increase in revenues generated from online digital reading business. Secondly, gross profit and margin. Non-GAAP gross profit for the first quarter was RMB165.6 million compared to RMB180 million in the same period last year. Non-GAAP gross margin for the first quarter increased to 51.3% from 49.3% in the same period last year. The increase of gross profit margin was mainly attributable to the decrease of sales of low gross margin products in paid services. In terms of cost of revenues, non-GAAP content and operational costs as a percentage of total revenues increased to 29.3% from 23.5% in the same period last year. This was mainly due to the increase in content acquisition costs. Revenue sharing fees as a percentage of total revenue decreased to 5.8% from 14.1% mainly due to the decrease of sales of MVAS products. Bandwidth costs as a percentage of revenues decreased to 5.4% from 5.9% in the same period last year. Sales taxes and surcharges increased to 8.2% from 7.2% in the same period last year. Thirdly, non-GAAP operating expenses for the first quarter decreased by 0.3% to RMB157.7 million from RMB158.2 million in the same period last year. Non-GAAP operating income for the first quarter was RMB7.9 million compared to RMB21.7 million in the same period last year. Non-GAAP operating margin for the first quarter was 2.4% as compared to 6% in the same period last year. The decrease was mainly due to the decrease in paid services revenue and the increase in mobile traffic acquisition expenses and bad debt provision which were partially offset by the decrease in revenue sharing fees to the operators. Fourthly, GAAP net income attributable to ifeng for the first quarter increased to RMB11.6 million from a net loss of RMB11.2 million in the same period last year. Non-GAAP net income attributable to ifeng for the first quarter was RMB14.7 million as compared to RMB23.6 million in the same period last year. Non-GAAP net income per diluted ADS for the first quarter was RMB0.2 compared to RMB0.3 in the same period last year. In terms of balance sheet items, as of March 31, 2016, ifeng's cash and cash equivalents, term deposits and short-term investments and restricted cash were RMB1.09b or approximately $169.3 million Lastly, I'd like to provide our business outlook for the second quarter of 2016. We are forecasting total revenues to be between RMB336 million to RMB351 million, representing a decrease of 20.5% to 17% year over year. For net advertising revenues, we are forecasting between RMB290 million and RMB300 million representing a decrease of 7% to 3.8% year over year. For paid services revenues, we are forecasting between RMB46 million and RMB51 million representing a decrease of 54.1% to 58.8%. This concludes the written portion of our call. We are now ready for questions. Please go ahead, operator.

[Operator Instructions] Your first question today comes from the line of Wendy Huang from Macquarie. Your line is now open.

Thank you. My first question is regarding your revenue guidance. So this number seems way below the market expectation and also it looks like it suggests a weakness in both advertising and paid services segment. Can you elaborate the reason behind giving the softer than expected revenue guidance? And secondly, you mentioned that there was some management changes and the ex-Senior Vice President in charge of the advertising, sales, and marketing business actually resigned. Although you are now having the CEO to take the responsibility during the interim period, I just wanted to better understand whether this has anything to do with the Company's performance in the past quarters and also is there any way to revive the sales growth going forward. And lastly, given the revenue guidance, how should we expect the margin trend going forward. Thank you.

Hi, Wendy. Thanks for your question. I think me, Shuang, and Betty probably will each answer the -- one of your questions. First about the guidance for the second quarter. I think the second quarter, if we look at it, the paid service actually will experience more than 50% decrease. That's really just the legacy business continued going down, but when we look at the advertising revenue, we are expecting between 7% and 4% decrease year over year largely due to a couple of factors. First is PC, but it continued to move towards mobile. So while we continue to experience triple digit growth for mobile advertising revenue as we did in the first quarter, we do expect the PC ad revenue to feel the pressure in this current quarter. And also in addition to the budget shift towards mobile, the second reason is the macroeconomic condition remains rather uncertain. And thirdly, of course you did mention, which will be elaborated later by Shuang about the executive change for our advertising business. That adds to the uncertainty for this current quarter. But when we look at our advertising revenue guidance against our peers, you know it's only one company who has announced their results and the guidance, and we notice that for the first quarter and also for the second quarter, our revenue year-over-year change is doing much better than the peer company both in terms of the overall revenue and also in terms of when we look at the PC revenue. I think so, we will see this overall uncertainty caused by the couple of factors I mentioned effect in the next three to four months as we experience the temporary -- the change caused by the advertising executive's departure. And Shuang, if you want to add anything.

As to Andy, we certainly regret that Andy has to leave for his new post and we understand his determination to take on a new challenge. I want to take this opportunity to thank Andy for his commitment and excellent work in promoting our brand singlehandedly to build up our native ads sales team and industry influence and also his contribution to our mobile ad sales. I wouldn't worry too much about he leaves. As you know, the key to ad sales, Internet ad sales is the teamwork. Besides leadership management and also a couple of other key factors contribute to your quarterly and annual ad sales including your brand, your market share, your traffic, and your internal coordination. The sales team has been with us for almost ten years. The team has remained stable and we have together witnessed the market downturn and upturn. So the team is very committed to our core clients and core business. And we still think there is some room for further improvement, especially on our media ad sales and the web ad sales, and Ya and I, we will work together to further focus and improve the ARPU and the CDM in this regard, and this leads might have three to four months' impact. But overall we're confident about our ad sales perspectives.

Hi, Wendy. This is Betty. As with respect to your third question, our margins, actually, as Ya mentioned earlier that we are still very confident on the growth of our advertising sales on mobile, it will definitely, we'll be in line with the industry growth expectation, however, we are experiencing the quicker than expected downturn for the PC advertising sales. As a result, we have toned down our expectations on PC sales, hence it has affected the total net revenue of full year. As a result, it will definitely affect our margins. Secondly, because of the fierce competition on acquiring a mobile user we have been increasing our mobile traffic acquisition cost for the full year. So these two factors combined, I think, moving forward, our margins will be definitely being affected.

Thank you.

Your next question today comes from the line of Binbin Ding from JP Morgan. Your line is now open.

Hi, good morning, management. Thanks for taking my question. My first question is can you just quickly update us on mobile app contribution in the first quarter of 2016? And I recall last quarter was 35%. And among the total mobile ad revenue could you please share the breakdown by ad format or platforms? So, for example, how much is coming from user application, how much is coming from mobile video? The second question is regarding the general regulatory environment in China Internet industry, especially given the recent changes. Just wondering if, is there any rising concerns regarding our Phoenix OM [ph] business? Thank you.

Hi, Binbin. This is Ya. The mobile ad revenue contributed 44% of our ad revenue in the first quarter. I think that's a rather a quick increase of a year ago, of just 21%, or from the fourth quarter of 2015, which was 35%. And among the mobile ad revenue, we do not break down the revenue between the mobile news app or the web page, because it is hard sometimes, to break down, because we do sell integrated solution to our clients. However, I do want to mention that there are a couple new factors we expect to help increase -- help us to continue the mobile revenue increase. First is native marketing, native advertising solutions on mobile. Second is the native -- the video, mobile video revenue contribution. I think these two reflect the overall trend we are seeing in the industry, and also, especially the native marketing and native video advertising, they are based on our own strengths and experience, and that's something will help us to continue our mobile ad gross. And for the regulatory environment, I just first want to touch base on its impact on advertising. We did mention, I think in the last two quarters, our earnings call, that the regulatory change about healthcare and (inaudible) services marketing already affected our revenue contributions from those sectors. We have minimum exposure from these sectors now. And also, we have very little ad revenues from some very -- I would say some, like the P2P financial services, we had little exposure from that. We did see ad revenue increase from overall financial services, but it's from more -- from low risk and more mature categories, like the banking clients. So that's their thing for the regulatory change for our advertising business. And about the regulatory pressure for the accounting [ph] business, I think we are also saying that there's a -- I would say it's an exponential growth in self-media and also live broadcasting, in China and also in the US. We'd like to see some of the regulatory intervening, because we believe that the overall media environment, especially helped by the social platform, needs some better regulation. That's in order for media with high reliability and the media influence, and the accountability, to play the role a society like China actually needs. So, we don't see any negative impact from any regulatory changes in China. We believe, in a way, we will benefit from better, a healthier environment. [Chinese language spoken]

Okay, that's very comprehensive. Thank you very much. Thank you.

Thank you.

Our next question today comes from the line of Natalie Wu from CICC. Your line is now open.

Hi. Good morning, Shuang and Ya and Betty and Matthew. Thanks for taking my question. I have a couple of questions here. The first is, aside from budget switch from PC to mobile.

Can you speak a little louder?

Can you hear me?

Natalie, your voice is very soft. Can you speak up, please?

Is that better?

Yes. Yes. Much better.

Just, yes, just the first question is regarding to your second quarter guidance in terms of ad revenue, aside from budgets, switch from PC to mobile, and a macro headwind, can management elaborate on any signs that you may witness, like a typical sector of advertisers, maybe? And I'm just wondering what the top five advertisers potentially in the first quarter. And the second question is we know that some RSS feed competitors are actually generating very decent revenues. Just wondering what is the update on EDN? And you mentioned that EDN has already got 25 million active users by the end of April. Just wondering how much is contributed from Xiaom and how much is contributed from HTML5 and our own app? And the last question is just, can management elaborate something about the latest financing details on maybe the EDN? Thank you.

Okay, thank you, Natalie. This is Ya. First, about the advertising sector's observations. First I think, about the first quarter, the top five sectors are the older sectors, the e-commerce, the financial service, Internet services, referring to the, like the sharing economy, the Uber-like companies, and also the food, beverage and wine. And what we are seeing in, I think in the top sectors actually reflects a combination of uncertain macroeconomic conditions, and also some of the, I think, policies, or I would say the government policies or regulatory environments. Firstly, the soft economy restricted the auto sector, our largest contributor, to grow too much. I think it remains flat, almost flat. I think the actual contribution percentage decreased. For the first quarter it decreased from 30% to 26%. I think, despite some of the government incentive plans, I think the overall auto consumption is held by the macroeconomic condition. And also, the over competition from the manufacturers actually forced, I think, a lot of the brands to cut their budget in order to remain -- keep their margin, or profitability. That also affected the overall budget allocation. So all those factors, I'd say it's just flat. It's not strong. And for the e-commerce, I think, the facts overall, we are seeing the trend that it's more a result or exact of performance driven, and due to the large -- or oversupply of Internet media or Internet app inventory in the market, I think, so we are also seeing less than expected growth for the e-commerce sector. We are seeing strong growth for the financial services, I think mainly due to our audience profile. Our audience actually are the best consumers, plug-in consumers for the bankings, for the real financial services, especially compared to our -- to the other platforms. And then, regarding food, beverage and wine, the food and beverage sector are seeing, I think, declining the budget, I think last quarter, fourth quarter of 2015. And for the wine sector we are expecting some rebound this year. And for the Internet services like the sharing economy, I think, due to the consolidation of some of the companies in the O2 sector, in the sharing economy sector, we are not seeing a very strong budget growth. So that's the sectors observation, but overall I think the macro condition uncertainty and the, I think large decrease in chiefly advertising are the main factors, and also, as we mentioned, the departure of the advertising executive also adds to the uncertainty. So we have to be very careful to tone down the guidance. And second question about the EDN's user base and its breakdown and its revenue, yes, we did reach 25 million overall daily active users in April. Yes, we do have a significant part of the user from Shami. However, we are working very aggressively to increase users from other channels, and we do expect Shami's contribution to the overall user base to significantly decrease in the next three quarters. And in terms of revenue, yes, we are seeing very high revenue, I think, growth, in April, as well. I think we will be able to provide more detail about the revenue outlook after the second quarter. But we are confident about the revenue growth of EDN. It's due to a couple of a factors. First of all, it's listing large user base, and secondly, our confidence in at least double the user base by the end of this year. And thirdly, because our unique technology of interest engine, which allows us to provide a better user profile, a better [talk heating] technology, and we did develop -- we developed our own mobile advertising platform, called Ling Shi platform, and we are seeing very strong results. There's a better, very good performance for our clients. That's why we are confident that the ad revenue growth for EDN will accelerate. We currently have advertising technology and a sales and support team of over 120, and we believe that our advertising results or performance will catch up with the leading -- the peers, in the next 12 months. And I think with EDN's strong user and expected revenue growth, and once we are able to consolidate, as we are planning to do it, into iPhone, I think it will also help the overall iPhone's performance. And last, about EDN's financing, EDN itself is generating, I think, rather, I think, meaningful or large scale revenue already, and however, it's also aggressive in marketing and channel expending, and that's why it does -- it is looking for the next round of financing, but we will make announcements as we -- hopefully, in the next couple of months.

Thank you. That's very helpful. Can I just end up with a very simple question about the revenue side of EDN? Just wondering how should you, at this quite stage that EDN currently at, compared with the competitor, maybe today's headline? Today's headline of half a year ago, or one year ago? I mean, just incomes of the revenue size?

You mean, revenues from the key metrics of the ad revenue? Like, we think [ph] -- internally we measure, like the CTM rate, the CTC rate, and some other conversion rates, and of our advertising campaign against the industry peers. And I think, because that provides us the confidence, once we are able to grow our user base, then the overall revenue will increase. So we are careful in hiring the best, to develop our advertising, mobile advertising platform and solutions. And also, we are looking at some innovative advertising products, because, as we communicated earlier, the unique interest engine combines the recommendation engine used by companies like Touchal [ph]. Combine that with the search engine technology used by Google and Baidu. So the interest engine allows us to combine the users' expressed interest with the exhibited behavior, which provides a better user profile, and we want to have over 200 -- over 2.6 million user subscribed channels. Those channel subscription provides us space for some rather innovative advertising solutions, because those subscribed channels express -- indicate users' mid to long term interests, and these interests are not like those leisure, entertainment driven interests. These are useful, normally useful interests, which provides real value to the audience's work, life, family or education or consumption, and so, we believe this technology will provide us to have better key metrics of advertising solutions, advertising products, in the long term. And on the other hand, we are working to expand the user base by innovate our marketing and channel strategies, to work with more companies like Xiaomi. So we are seeing -- and we are also encouraging to see our peers add revenue to grow rather fast, which validates the effectiveness of our similar business models. And I think, yes, and hopefully, by the end of this quarter we will provide more quantitative guidance.

Okay, thank you.

Thank you.

[Operator Instructions] Hi, it seems that we have no further questions on the line today. I would now like to hand the conference back to Mr. Zhao for closing remarks.

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

Ladies and gentlemen that concludes our conference for today. We thank you for your participation. You may now disconnect.