Phoenix New Media Limited (FENG) Q4 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Phoenix New Media Fourth Quarter and Fiscal Year 2017 Earnings Call. At this time all participants are in listen-only mode. [Operator Instructions] I must advise you that this conference is being recorded today, Tuesday, the 13 of March, 2018. I'd now like to hand the conference over to your first speaker today, Ms. Nicole Shan. Thank you. Please go ahead.

Thank you, operator. Thank you, and welcome to Phoenix New Media fourth quarter and fiscal year 2017 earnings conference call. I'm joined here by our Chief Executive Officer, Mr. Shuang Liu; and our Chief Financial Officer, Ms. Betty Ho. For today's agenda, management will provide us with the review on the quarter and also include a Q&A session after the management's prepared remarks. The fourth quarter and the fiscal year 2017 financial results and webcast of this conference call are available at the Investor Relations section 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 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. Shuang Liu, our CEO.

Thank you, Nicole. Good morning and good evening, everyone. In the fourth quarter of 2017, we carried through our strong growth momentum from the previous quarters and achieved strong growth in advertising revenue. Our total revenues increased by 12% year-over-year, RMB462 million. We exceeded the high-end of our previous guidance range. In particular our net advertising revenues increased by 16% year-over-year to RMB411 million, primarily driven by a 63% year-over-year increase in our mobile advertising revenues. Looking back in 2017, the Chinese Media landscape continued to involve and the regulatory environment has been under very tight scrutiny. As the Chinese leading professional news distributor, who have been focusing on providing high quality news and current affairs, we appreciate and embrace the new policy against fake and vulgar media content, as it enables firm to be able to take advantage of our core competencies in providing professional journalism, as well as truthful [ph] and newsworthy content to our users around the world. It further enables us to stay at the forefront of the media space and will enable us to capitalize on this market trend going forward. After the conclusion of the 19th National Congress of the Communist Party of China in October 2017, we properly followed the government's guidance and introduced several of initiatives to promote the themes of poverty relief and charity. For example, in October 2017, we organized the Super Charitable Month Charity event, where we donated RMB5 for every advert we gather to help artistic disabled or abused children. Later in December, we hosted the 2017 iPhone Beautiful Childhood Charity Gala raising over RMB46 million for the foundation. We're very excited the government supports our long term charity endeavors, and encourage companies like us to continue our work on social issues. We are honored to be able to utilize our resources and brand interest to contribute to society. We're also pleased that in doing so our premium brand gains additional recognition from our users, which consequently attracts more advertisers. Fourth quarter ARPU increased significantly by 26%. In addition, programmatic advertising achieved over 100% year-over-year growth during the previous two consecutive quarters and 71% year-over-year growth in the past quarter. We've also developed an app for advertising agencies on the Phoenix platform, the first of its kind in the industry. This app enables managers to maximize the efficiency and ROI of their ads by allowing them to monitor and adjust the ads anytime anywhere. As for brand advertising, we continue to optimize our native advertising solutions where we help our clients to develop advertorials by merging their ads into informative articles. By doing so, we improved both the click through rates and the conversion rates of our planned ads, by delivering them to more people than ever before in a more value added way. With respect to our live broadcast and the video streaming strategies, we remain committed to reporting major global affairs with an emphasis of news that attract Chinese audiences. An example is our reporting of the controversial Jiang Ge Tokyo Murder Case in November. As the first major media outlet of China to report this story, our 10 day coverage of this case including the live broadcast of the trial generated over 50 million views and became the primary portal for Chinese citizens to follow the case. During the quarter, we also explored new initiatives to further enrich our content offerings and create our own intellectual property. Partnering with Shenzhen Media Group and the Guangzhou Weiye Culture Media, we launched a journey through literature Idosucha [ph], an innovative TV mini-series that explores Chinese culture and philosophy. More than 150 million views were generated on iPhone during the show of six week broadcast. The program has been well received by audiences and was praised by the Peoples' Daily. We're committed to building competitive IP and providing additional premium content to our users, thereby attracting brand advertisers. We expanded our product line by adding a new Paid Knowledge Sharing product, called Zhizhi. We have invited celebrities, including commentators, Ollie [ph] and journalists, and talk show host [indiscernible] to provide professional knowledge to our users. We believe that, our strong media DNA will help us to broaden our market share in this field. Now let me turn to Yidian, our personalized news investments, which saw its full year growth revenue triple to RMB1.5 billion. Yidian has been expanding its distribution channel to other handset manufacturers, in order to increase its organic traffic. In addition, we are plan to connect Yidian to our programmatic advertising platform, Fengyu to better utilize Yidian’s traffic. We expect the synergy between Yidian and Fengyu to improve the monetization capability and efficiency of both platforms. Further as Yidian continues to benefit from the license for Internet News Information service issued by the Cyberspace Administration of China, we believe the value of Yidian will increase substantially and we expect Yidian’s to ongoing momentum will carry into 2018. Finally, let me give you an update on our digital reading business, Fongyu Novels [ph]. In the fourth quarter, we continue our efforts in constant diversification and talent cultivation. We have broadened our reading categories, by adding two of the most popular genres with our younger target demographic: chat stories and comics. We are also brought in several renowned novelists with award winning works to further enhance our constant production capabilities. Consequently, our digital reading revenue increased by 51% in the full year of 2017 compared to 2016. We are confident that with our diversified content offerings and strong content production capability, digital reading will become one of our major growth drivers in the quarters and the years ahead. I am very excited about the progress we achieved in 2017, in that environment of increasing competitiveness and regulatory change, that’s good. To stay ahead of our competition, we will continue to grow our user-base and expand our market share, by investing in traffic acquisition. We have also taken active steps towards improving our profitability and controlling our channels, use channel comps to maintain the sustainability of our growth and our eco-system. While we continue to prudently invest in our traffic acquisition, we are closely monitoring the return on our investments. Our focus is to improve our user acquisition, retention and usage duration rates, so with constant and product enhancements instead of relying solely on traffic acquisition spending. With our breadth in news, credibility, professional journalism and the synergies between our business segments, we believe we are well positioned to capture the opportunities ahead and deliver long-term value for all of our shareholders. With this I would turn the call over to our CFO, Betty Ho.

Thank you, Shuang, and thank you all for our joining our conference call today. I'm pleased to announce that we once again delivered solid quarterly financial results and closed out a challenging year on a high note. Ifeng's total revenue for the fourth quarter of 2017 increased by 12.1% to RMB461.8 million from RMB411.9 million in the same period last year, which beats the high end of our previous guidance. This growth was primarily attributable to the 62.6% increase in mobile advertising revenues. Non-GAAP net income attributable to Phoenix New Media for the fourth quarter of 2017 was RMB11.6 million and non-GAAP net income per diluted ADS was RMB0.16. Now let me take you through our financial highlights for the fourth quarter of 2017. The amount mentioned here are all in RMB, unless otherwise noted. The differences between GAAP and non-GAAP consist of share-based compensation, and gains and loss from equity investments including impairments. Starting with revenue, net advertising revenues for the fourth quarter of 2017 increased by 16.3% to RMB410.5 million from RMB353.2 million in the same period last year. The increase was primarily due to a 62.6% increase in mobile advertising revenue, which was partially offset by an 18.1% decrease in PC advertising revenues. Paid service revenues for the fourth quarter of 2017 was RMB51.2 million as compared to RMB58.7 million in the same period last year. Revenues from digital entertainment for the fourth quarter of 2017 decreased by 12.9%, to RMB39.5 million from RMB45.4 million in the fourth quarter of 2016. This was due to a 27.7% decrease in MVAS revenues partially offset by RMB19.2 million increase in digital reading revenue to RMB17 million. Revenue from games and others decreased by 12.1% to RMB11.7 million from RMB13.4 million in the same period last year, which was primarily due to the decrease in revenues generated from web-based games on our own platform. Non-GAAP gross profit for the fourth quarter of 2017 increased by 23.6% to RMB254.3 million from RMB205.7 million in the same period last year. Non-GAAP gross margin for the fourth quarter increased to 55.1% from 49.9% in the same period last year. The increase in gross margin was primarily attributable to the increase in revenues and decrease of certain cost of revenues as stated as follow. Non-GAAP content and operational cost as a percentage of total revenue decreased to 30.8% from 33.9% in the same period last year. This was mainly driven by the company's strict control of general operating costs. Revenue sharing fee as a percentage of total revenue decreased to 2.7% from 4.2%. Bandwidth cost as a percentage of revenues decreased to 2.8% from 3.7% in the same period last year. Sales taxes and surcharges increased slightly to 8.6% as compared to 8.3% in the same period last year. Non-GAAP operating expenses for the fourth quarter of 2017 increased by 39.6% to RMB255.1 million from RMB182.7 million in the same period last year. Non-GAAP operating loss for the fourth quarter was RMB0.8 million as compared to non-GAAP operating income of RMB23 million in the same period last year. Non-GAAP operating margin for the fourth quarter was negative 0.2% as compared to 5.6% in the same period last year. The decrease was mainly due to the increase in mobile traffic acquisition expenses. As competition increases in the news sector we will continue to invest in traffic acquisition while diligently monitoring ROI. Net income attributable to iPhone for the fourth quarter of 2017 was RMB11.8 million as compared to RMB39.8 million in the same period last year. Non-GAAP net income attributable to iPhone for the fourth quarter was RMB11.6 million as compared to RMB41.4 million in the same period last year. Non-GAAP net income per diluted ADS for the fourth quarter was RMB0.16 as compared to RMB0.57 in the same period last year. Now I will discuss our balance sheet. As of December 31, 2017, the company's cash and cash equivalents term deposits and short term investments and restricted cash were RMB1.44 billion or approximately $220.9 million. Restricted cash represents deposit placed as security for banking facilities granted to the company, which are restricted as to their withdrawal or usage. Let me briefly run through the key figures for fiscal year 2017. Total revenue for 2017 exceeded our expectation and increased by 9% to RMB1.58 billion from RMB1.44 billion in fiscal year 2016. Net advertising revenue increased by almost 10% to RMB1.35 billion from RMB1.23 billion in fiscal year 2016, of which, mobile advertising revenue increased by 46.5% year-over-year, which was partially offset by the decrease in PC advertising revenue. Paid services revenue increased by 4.2% year-over-year to RMB221.6 million. The increase was mainly due to the increase of digital revenue, which increased by 51.3%. Total fiscal year 2017 non-GAAP gross profit increased by 19.5% to RMB852.9 million, which represents a 54.2% non-GAAP gross margin as compared to 49.4% last year. Non-GAAP operating income for 2017 decreased by 3.8% to RMB35.8 million as compared to RMB37.3 million in the fiscal year of 2016. Non-GAAP operating margin was decreased slightly to 2.3% from 2.6% in the fiscal year of 2016. Non-GAAP net margin for 2017 was 3.3% as compared to 5.8% in 2016. Non-GAAP net income attributable to iPhone for 2017 was RMB52 million or RMB0.70 non-GAAP net income per diluted ADS. Lastly, I would like to provide our business outlook for the first quarter of 2018. The company has adopted a new revenue standard ASC 606. Revenue from contracts with customers, which took effect on January 1, 2018, by applying the modified retrospective method, under the new accounting standard, sales taxes and surcharges previously presented as a component of cost of revenues are now presented as a reduction item of revenues and some advertising for advertising partner transactions, previously not recognized as revenues are now recognized as revenues since January 1, 2018. For comparative purposes, we are forecasting total revenue under the old revenue standard as opposed to the revenue guidance provided under the new revenue standard in our earnings releases, to be between RMB299.2 million to RMB314.2 million, representing an increase of 1.6% to 6.7% year-over-year. For net advertising revenues, we are forecasting between RMB261.9 and RMB271.9 million, representing an increase of 8.6% to 12.8% year-over-year. For paid service revenues, we are forecasting between RMB37.3 million and RMB42.3 million representing a decrease of 30.1% to 20.7%. In summary, by controlling traffic acquisition expenses, as well as other operating expenses we turned around to become profitable as compared to our initial budget for the full year of 2017, which exceeded our expectations. So with this year's competition in news read sector, we believe our transition to mobile has paid off. And our serious journalism can be fully appreciated amid the current environment. Thus we expect our 2018 operating results will be better than 2017. This concludes the prepared portion of our call. We are now ready for questions. Operator, please go ahead.

Thank you, ma'am. Ladies and gentlemen we will now begin the question-and-answer-session. [Operator Instructions] We have our first question from the line of Wendy Huang from Macquarie. Please ask your question.

Hi management. This is Frank Chen on behalf of Wendy Huang. Thank you for taking my question. I have two questions. First one is about digital reading, I noticed that the growth rate of digital reading revenue was 19% year-over-year in this quarter. I wonder if there is any particular reasons behind the slowdown of the growth rate. And the management mentioned that the digital reading will be -- will continue to be the key growth driver in 2018. How should we look at the growth rate of this sector in this year? And I wonder if management could share any color on the operating data of the digital reading segment, for example the user traffic including the MAU and DAU and as far as paying user count. The second question is Yidian. May I ask the Yidian's revenue target for this year? And what's current user traffic of Yidian? And could you give us some update on Yidian's next round of financing as well as what's our plan of consolidating Yidian? That's all my questions. Thank you.

Thank you. This is Betty. Let me answer your question with respect to the digital reading first. Our digital reading actually consists of our total revenue of about only about 10% to 12%. So although it's a very strong growing business, but the size are still relatively small as compared to our advertising revenue. Digital reading, actually the revenue in 2017 has grew over 50% as compared to 2016. And we are expecting the strong growth will be continued as we actually added two new products which is live chat -- chat reading and comic book. So these two products will enhance our revenues and top-line going forward. Actually the digital reading actually grew all our PC and WAPH. So actually they launched the Fengyu ads only late last year. So it's still growing. The size of the DAU is relatively small. So we tend not to disclose at this stage. As for the Yidian’s user traffic, actually currently this -- as of February this year, the DAU has remained very similar to last quarter. The major reason was because of the 19th Congress and followed by the two sessions, Congress and also because of the Chinese New year. So the DAU we don’t see a significant growth of the DAU of Yidian. And in terms of the financing and consolidation, I’ll let Shuang to answer your question.

Yeah, as to Yidian financing, the legal closing is already closed. The Yidian financing – the financial closing of Yidian financing I think, we have been informed by related party that will be closed by the end of March, by the end of this month. So we will disclose any related information in due course. As to year-long financing, actually we don’t have specific timetable for -- from ads. The details will be discuss after Yidian is financially closed. Normally a deal will take six to nine months to close. As a leading modern use and information service provider, Yidian is definitely one of the most promising capital sectors. It's warmly welcomed by the investors. As the first non-state owned company to receive the license for Internet news information service Yidian is differentiated from other Internet News service provider in China. So it is expected to gain additional competitive advantage in channel expansions and content operation. We have been having preliminary meetings with different type of investors and have found Yidian is well received by the capital market, but we cannot disclose the exact timetable for year-long financing. As to consolidation, as I mentioned Yidian is our strategic investment. So the right to consolidate Yidian’s financial statement is very important right for us. The reason we didn't disclose -- we didn't consolidate Yidian’s financial statements is because Yidian is still at early stage. So from competitive point of view, we don’t want to disclose Yidian’s key operating metrics at present stage. So after consulting with Yidian’s shareholder and auditors, we set the operating benchmark, operating metrics when Yidian hit the target, we will consolidate Yidian’s financial statements. But now there are new developments further complicating the best timing to consolidate Yidian’s financial statements. Number one, Yidian’s, there are two encouraging developments, one is Yidian’s browser users growth is very strong and it seems to us that there is a new opportunity for us to reallocate resources to capture this opportunity. So this will affect key operating metrics. The other development is China CRC is reported to be ready to issue new policies to favor certain VIE structure companies to come to Asia’s market. These companies with market cap reaching certain level, in -- operating in certain industry will be specifically favored. Yidian, which definitely fall into that category, so that grant us more options to best maximizing shareholder value. So these two new developments complicate the -- actually has very deep integration on our further listing user growth and operating strategies. So we will monitor these new developments to decide whether -- when is the best timing for us to consolidate Yidian’s financial statements, I think in the next two or three quarters.

Thank you very much.

Thank you.

Our next question is coming from the line of Binbin Ding from JPMorgan. Please ask your question.

Hey good morning management. Thanks for taking my question. Congrats on the good results. My first question is on the regulatory environment. It seems like there is tightening of regulations across the media and the overall content business in China over the past few months. Does management think this is more of a short term hiccup because of the ongoing National Congress meeting or it could be a long lasting situation? And also what's the potential impact on us and other media formats such as social media video streaming platforms and other mobile news applications. That's my first question.

Hi, this is Shuang. I think the regulatory grip on this market is understandable. First is because of the ongoing Chinese two sessions, one is CBPCC, and the other is NPC. So they're totally understandable. That happens every year. And the second is with the proliferation of new feed product, the competition among the players is intensified. So there are some problems in this market. Some players try to leverage algorithm to capture more users. Some even go further to try to exploit the vulnerability and weakness of human nature by using taking fake news, exaggerated titles and use market [ph] content to capture users' eyebrow to improve click-through rate to expand the time spend. So this is not good for the healthy development of industry. The supervisory body of the government recognized these problems, trying to crack down on these practices. So we fully endorse this policy. And I think the policy is on the right direction. Of course it has impact on operation of all these news feeds products, even social networking service providers. But I think that impact is limited especially for us. Phoenix New Media, we, as a responsible media player in China we have made it clear in numerous industry summits include the worldwide internet forum in Wuzhen, we have been integrating our social responsibility, professional journalism and in-depth understanding of media consumer behavior into our internet algorithm. And we want to combine artificial intelligence with human judgment to achieve our mission, which is to inform, to entertain, to enlighten, to empower our users to some competitors to -- to rally to broaden the horizon, not the opposite. So because of our media DNA and our serious journalism, I think we are good at it. That what differentiates from others. So pretty shortly, we think the new regulatory changes certainly has impact on the market, but the impact is short and limited and from mid and long term point of view, it's very good for the healthy development of the market. And I think we will fully support it. I think we will benefit from this eventually.

Okay, thank you. And my second question is on the video content. So can management give us some color regarding what's the percentage contribution from video content in terms of both time spend and active user base for both iPhone and EDM platforms? And also related question is on the verticalization of mobile information apps. As you look at one of the major competitors, Totel [ph], I think they have successfully spun up a number of vertical channels into independent mobile apps covering short video live streaming and even automobile sector. All of these apps have achieved decent user size over the past year. So I was wondering if management could share your insights on such strategy and in terms of our own mobile app, Yidian, do we have similar any similar thinking behind this. Thank you.

Thanks Binbin. As with respect to our video content strategy, actually we have been very good at short video, because we inherited the DNA from our parent company. We are good at short video clips. But as Shuang mentioned earlier, since the tightening of the policies, we have been very prudently to provide such content. So we are expanding. As for Yidian, actually out of the 51 minute time span of Yidian DAU of Yidian's user, most of which have been spent on video. Yidian has been expanding its video content through the sales media Yidian hub, and actually it has been very well received because we have combined our sales media account with Yidian. The combined account is Yidianhao and Dafung Hau [ph] combined -- consolidate together, out of which we have a total of over RMB88 million distribution of the sales media account. So that provide a very huge distribution channel for the sales media. And also because of Yidian has obtained its first internet new license, so this Yidianhao platform has become the most preferred platform for content creators, including both personal and institutional accounts based on the combined platform's competitive edge on legitimacy and as well as their distribution ability, as I mentioned earlier. Now for the sales media, we have over 550,000 accounts. It was five times as compared when we launched about four quarters ago. We are keen to continue to grow the sales media account to enrich our content. But on the hand other e are also encouraging our editors to create their own original content, because we have been very good at produced premium content and serious journalism. So we are encouraging out editors to create original content as to enrich our content library. So this is for our content strategy as for now, and for verticalizations, actually as you mentioned, other players diversified into their verticals. We actually as for our financial verticals we have been doing very well. It has been ranking number one on We Shing official -- We Chat official account. So we actually invest additional time and money of course investment on develop this financial verticals. Especially we are actually thinking of launching some paid surface on pay basis for with respect to the financial related topics to the targeted user, because of that users which are using -- which our official accounts are very, very targeted users. So in order for us to create very customized financial related services to our users. So this all are our virtualization strategies. And as for Yidian's, overall video and content strategy I'll ask Shuang to further add some color on it.

Yeah, as to Yidian's product strategy, actually we are not in the position to comment other players. But for us, at current stage, our strategy is to focus on our two flagship apps. One is Ifeng news, the other is Yidian news. These two apps lay the solid foundation for our mobile strategy. Ifeng news is a more news driven target at mainstream customers and to deliver -- to achieve the personalized delivery of high quality tasteful and the premium content, while Yidian is targeting at a broader demographic, because two of its shareholders are Xiaomi and OPPO. So the demographic is different from iPhone. And also we try to balance the news and entertainment. It's more technology driven. From branding point of view, these two products are different. Fungfa [ph] is more high end more mainstream, our emphasize on the use -- on the tasteful and news worthy information delivery, while Yidian emphasize useful and interesting information delivery. So the market positioning the demographic, the approach they are using are complementary to each other. So these two apps lay down the solid foundation for our mobile strategy. But of course we are also monitoring the vertical areas opportunities like that effect in finance area. Also we are looking at the video area. But our approach will be very prudent. We will be very careful about ROI especially in terms of the acquisition costs. So we will leverage our brand, our expertise in vertical areas and to combine our online and offline resources to develop the vertical areas. And also our two major shareholder, Yidian two major shareholders is Xiaomi and OPPO provide us more opportunities to capture broader demographic from our handset users. So that’s one of the resources that’s other players cannot have. We’ll fully leverage it to further expand our two apps market penetration.

Thanks for the color, Shuang Jon and Betty Jon pa [ph] that’s very helpful. Thank you.

Thank you.

Our next question is coming from the line of Chen Chao from CICC. Please ask your question.

Yes, hello, management, thank you for taking my questions. Chen Chao on behalf of Natalie. And I just have a very quick follow-up question about mobile advertising business, and could management give more color about the breakdown of our advertising categories and do we see some potential budget shift from specific advertising capability in 2018? Thank you. A – Betty Ho: Hi, this is Betty. With regard to the advertising revenue, our advertising revenue in Q4 showed a very strong momentum. With net advertising revenue grew over 16%, mainly driven by the strong growth of our mobile app of over 60% growth. This -- it was mainly because of firstly of our sales team was becoming more efficient after the reorganization about a year ago. Secondly, our programmatic buying on our own DSP platform has been growing over 100% for the consecutive two quarters since its launch in second quarter of 2017. And we continue seeing the strong growth of well over 70% in the quarter in Q4, 2017. Last but not least, Q4 is generally a very strong quarter due to seasonality as most of summits and activities were being held in Q4 every year, thus increased both the revenue and expenses. Looking ahead for this year, we believe the strong momentum of our ad growth will continue into 2018. We expect we have a double-digit growth of our ad revenue. On the other hand we are also increasing our tech under a very tight control on ROI. We remain confident that our operating results will be improved as compared to 2017. I hope I answered your question. Chao?

Yeah. And I think it's good, part of my question. But I really curious about if there are any focused advertise category in 2018, you are focused on the growth?

In 2018, I said the most drivers will be coming from the mobile revenue, all of which on the mobile platform mostly are sold by our programmatic buying. We launched our programmatic buying DSP platform about a year ago which was very successful and showed a very, very strong growth. And also we are going to a launch a new product is the programmatic buying app made specifically for SME advertisers to use. So by using this they're actually obtaining a very efficient real-time bidding everywhere anywhere, which enables a very targeting marketing. And for them, and also to maximize of their own ROI, during 2017, I can see a specific customer, auto-related customer, by using this programmatic buying, their return actually increased by over 200% during the placement period. So we -- this is very helpful to the advertisers.

Okay understand. That's very helpful. Thank you.

Thank you.

There are no further questions at this time. I'd like to hand the conference back to today's presenters. Please continue.

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.

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