Phoenix New Media Limited (FENG) Q2 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Phoenix New Media 2018 Second Quarter Earnings Call. [Operator Instructions]. I must advise you that this conference is being recorded today, Wednesday, the 15th of August 2018. I would now like to hand the conference over to your first speaker today, Ms. Qing Liu. Thank you. Please go ahead.

Thank you, Operator. Thank you, and welcome to the Phoenix New Media Second Quarter 2018 Earnings Conference Call. I'm joined here by our CEO, Mr. Shuang Liu; and CFO, 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 second quarter 2018 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 RMB. With that, I would like to turn the call over to Mr. Shuang Liu, our CEO.

Thank you, Qing. Good morning, and good evening, everyone. We are pleased to report that in the second quarter of 2018, while preserving our strong media DNA, we've streamlined our resources and made significant progress in our products and content operations. Experiencing the continued growth momentum, our advertising revenue generated from our FENG app has increased by 43.2% in the second quarter of 2018 under the old accounting standard. In the quarter, we continued to cooperate closely with the government regarding the enforcement of online content regulation in China. Toward this purpose, we leveraged our technology capabilities to optimize our algorithm, significantly augmenting the efficiency and accuracy of our content library through [indiscernible] compliance process. In doing so, we try to strike a fine balance between maintaining market competitiveness and regulation compliance while upholding our commitment to delivering original, unbiased and high-quality news coverage to our users. Now turning to our product innovations. Let me give you an update on our ongoing effort to improve our ifeng News app and our progress in this past quarter. As part of our ongoing effort together with customer feedback, we organized a social event in June where we encouraged our users to identify our shortcomings and deficiencies. Through the feedback that we received, we were able to improve our products and services. In addition, to ensure the optimal user experience, we significantly accelerated the process of product improvements to once every other week. We believe that our continuous product enhancement will not only maintain and engage existing users but also attracting users and thus accelerate our revenue growth for the remainder of 2018. The average time spent per users on our media content increased substantially, and video content accounted for half of user total time spent in the second quarter. Obviously, with respect to our live broadcast and video streaming strategies, our efforts have already started to bear fruit. Looking ahead into the second half of 2018, we will integrate video content into our we-media operations and aggressively recruit more we-media content producers to establish accounts on our platform. In addition, we will produce more short-form videos from the enriched content library of in-satellite TV, of which they are obtaining high-quality content in history, culture and interviews. Meanwhile, we plan to strengthen our original video content production capability in all of our vertical channels. By leveraging the influence and credibility of our brand, we continue to differentiate ourselves from the competition, focusing on our original, unbiased and high-quality news. Building upon our strength, we have increased our investment to further improve our content production capabilities, especially for exclusive content. Recently, we had two exclusive high-profile reports on two international leaders. One was Premier Li Keqiang on the promotion of the world trade cooperation at 9th China-Germany Economic and Technical Cooperation Forum in July. And the other one was Vice Premier Mr. Liu He following his visit to the United States. Topics discussed include the latest developments on China-U.S. relationship with independent commentary. Such exclusive coverage not only created hype in the business but also in the frequency of sharing on social media platforms. Not only we aim to provide our users with the latest, the fastest, high-quality, time-sensitive news like current affairs and finance, et cetera, we'd also like to provide more diversified entertainment and knowledge-based non-sensitive information to increase the stickiness and time spent, and more importantly the overall experience of our users. The credibility, authenticity and uniqueness of our high-quality content, combined with the capability of our AI-based upgraded smart distribution system, has improved our coverage of major social events. We pride ourselves on the importance of original content, especially influencing our industry-specific vertical channels. We analyzed the ROI of our content investments in a concerted effort to optimize the efficiency of our editorial team. We have established multi-level editors for our original content using measures such as social media distributions and click-through rates, et cetera, to ensure that all the reports and analysis that we generate are of the highest quality for all of our coverage. To stay at the forefront of the industry, we are also increasing our investment in the creation of intellectual properties. Our private content differentiates us from our competitors, and so we see the continuous innovation of our IPs as crucial to our long-term growth. For example, we have pioneered a new form of infotainment that marry the elements of talk shows and reality shows with features of documentaries to inform and entertain our users at the same time. Our original content will specifically increase our exposure with the upper and middle class and younger demographics. These new and innovative ways of monetizing our IPs will not only increase the considerable influence our brand already has but also allow us to utilize our strong sales and marketing capability. We believe that these additional premium services as well as the brand influence that Phoenix New Media carries will help us further expand our users and client base. Lastly, let me address our strategy concerning our investment in Yidian. During the quarter, Yidian continued its steady growth trajectory in terms of DAUs and revenue. Yidian's DAU achieved high single-digit growth compared with 16 million in April. In addition, building upon the successful partnerships with Xiaomi and OPPO on content operation, Yidian entered a strategic agreement with another leading handset manufacturer to provide a full range of information services for its web process, further accelerating the traffic growth on Yidian. As we mentioned in previous earning calls, the board of Yidian has been considering the option of listing the company domestically. Should Yidian choose a listing in the Asian market, we'll be required to divest our equity interest in it prior to the listing due to PRC regulatory restrictions. We have had discussions with Yidian key stakeholders as well as Board of Directors. While nothing has been finalized or decided yet, we tend to think that the Asia market is the preferable listing value for Yidian where it can achieve an optimal market revaluation and thereby provide a fair investment returns to us when we exit the investment. Taking Yidian's extraordinary performance during the last 18 months into consideration, we believe it is reasonable to expect its valuation to be doubled compared with the previous round of financing, which will generate a sizable return on our previous investments. We plan to channel the potential user proceeds from Yidian's transaction to expand our user base and increasing our user stickiness. We seek to energize our robust growth trajectory through a combination of, again, growth and innovation with strategic acquisition. The organic growth. We continue to sharpen the competitive edge of our ifeng News flagship app and fortify our leadership in online news media industry. At the same time, we will also actively explore strategic investment opportunities in content management applications, especially those that have already established a community of younger demographics. In today's consumption upgrade area, we're working proactively to satisfy Chinese consumers' demand for services with our shared information editing and distribution. In addition to providing comprehensive information to our users, we're also enabling them to cultivate a happy, healthy and a fulfilling lifestyle through an ecosystem we're currently building. Such ecosystem targets the upper and the middle class. It shall be comprehensive, closed loop and lifestyle-related and mobile-ready verticals such as finance, wealth management, housing, food, travel, health, parenting and so on. It should enable us to not only substantially improve our user stickiness but also expand our business model to encompass transaction or subscription-based model on a variety of new revenue streams beyond our core advertising models. Leveraging our pervasive brand influence and our strong monetization capabilities, we're confident that our lifestyle [indiscernible] vertical-specific ecosystem will seamlessly complement our existing servicing - service offerings. In addition to exploring these new initiatives - innovative initiatives, we will maintain our unwavering commitment to strengthening our professional journalism and our leadership in the Chinese online media space. At the same time, we're optimistic that our new initiatives will potentially offer better services to our users and enable us to create long-lasting value for our shareholders. With that, I'll turn the call over to our CFO, Betty Ho.

Thank you, Shuang, and thank you all for joining our conference call today. I'm pleased to announce that we are seeing strong revenue growth momentum from our mobile app. Before I update you on the financial details, I would like to shed light on the impact of the newly adopted accounting standard ASC 606, namely revenue from contracts and customers, which took effect from January 1, 2018. By applying the modified retrospective matter under the new 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. For comparative purposes, here we'll provide our financial highlights under the old accounting standard, ASC 605. For the amount and ratios under the new accounting standard, please refer to our earning release where we have provided the financial items under both the old accounting standard and the new accounting standard. Now let me take you through our financial highlights for the second quarter of 2018. The amounts mentioned here are all in RMB, unless otherwise noted. The differences between GAAP and non-GAAP consist of share-based compensation and income or loss from equity investments, including impairments. ifeng's total revenue for the second quarter of 2018 were RMB396.7 million, which is in line with our previous guidance and represented an increase of 0.9% from RMB393.3 million in the same period last year. Non-GAAP net income attributable to Phoenix New Media Limited for the second quarter of 2018 was RMB53.7 million, representing an increase of 83.7% from RMB29.3 million in the same period last year. Non-GAAP net income per diluted ADS in the second quarter increased 81.1% to RMB0.74 from RMB0.41 in the same period last year. Starting with revenues. Net advertising revenues for the second quarter of 2018 increased 2.5% to RMB347.3 million from RMB338.7 million in the same period last year. The increase was due to the consistently increase of 23% in mobile advertising revenue, which was partially offset by a 26.6% decrease in PC advertising revenues, out of which the mobile advertising revenue from FENG app grew robustly in second quarter, representing an increase of 43.2% to RMB200.8 million compared with the same period last year. Paid services revenue for the second quarter of 2018 were RMB49.4 million compared with RMB54.5 million in the same period last year. Revenues from digital entertainment were RMB40.1 million compared with RMB45.6 million in the same period last year, which is due to a 29.3% decrease in the MVAS revenues, mainly resulting from a decline in users' demand for services provided through telco operators in China. Revenues from games and others for the second quarter were RMB9.3 million, representing an increase of 3.3% from the same period last year. This is mainly due to the increase in revenues derived from other new businesses, while the revenues generated from web-based games operated on the company's own platform were still declining. Non-GAAP gross profit for the second quarter was RMB230.1 million compared with RMB226.6 million in the same period last year. Non-GAAP gross margin for the second quarter of 2018 was 58% compared with 57.6% in the same period last year. Non-GAAP content and operational costs as a percentage of total revenue was 27% as compared to 26.6% in the same period last year. Revenue-sharing fee as a percentage of total revenues was 3% as compared to 3.8% in the same period last year. Bandwidth cost as a percentage of revenues was 3.5%, which is consistent with the same period last year. Sales taxes and surcharges were RMB34.3 million for the second quarter of 2018 as compared to RMB33.2 million in the same period last year. Non-GAAP operating expenses for the second quarter of 2018 were RMB196.6 million as compared with RMB196.2 million in the same period last year. Non-GAAP operating income for the second quarter was RMB33.5 million as compared to RMB30.5 million in the same period last year. Non-GAAP operating margin for the second quarter was 8.4% as compared to 7.7% in the same period last year. Net income attributable to ifeng for the second quarter of 2018 was RMB49.9 million, representing an increase of 100.2% from RMB24.9 million in the same period last year. Non-GAAP net income attributable to ifeng for the second quarter was RMB53.7 million as compared to RMB29.3 million in the same period last year. Non-GAAP net income per diluted ADS for the second quarter was RMB0.74 as compared to RMB0.41 in the same period last year. Now I will discuss our balance sheet. As of June 30, 2018, the company's cash and cash equivalents, term deposits and short-term investments and restricted cash were RMB1.32 billion or approximately USD 199.4 million. Restricted cash represents deposits placed as a security for banking facilities granted to the company, which are restricted as to their withdrawal or usage. Lastly, I'd like to provide our business outlook for the third quarter of 2018. As we have stated above, the company has adopted the new revenue standard, ASC 606, since January 1, 2018. For comparative purposes, we are forecasting total revenues under the old revenue standard. Revenue guidance under the new revenue standard is provided in our earnings release to be between RMB413.2 million and RMB428.2 million, representing a decrease of 2.9% to an increase of 0.6% year-over-year. For net advertising revenues, we are forecasting between RMB378 million and RMB388 million, representing an increase of 4.1% to 6.9% year-over-year. For paid service revenue, we are forecasting between RMB35.2 million and RMB40.2 million, representing an increase of 43.6% to 35.6%. In summary, we are pleased to our sustained growth momentum and margin improvement this quarter. As Shuang stated earlier, we will remain committed to strengthening our competitive advantage in our content offering and product innovation to further solidify our market-leading position. This concludes the prepared portion of our call. We are now ready for questions. Operator, please go ahead.

[Operator Instructions]. Your first question comes from the line of Frank Chen from Macquarie.

I have basically three questions. First, on the guidance. The 3Q guidance looks pretty weak. Especially, you guide the total paid service to decline around 40% year-over-year. Could you share more color on the reason behind this weak guidance? The second question is on margin. I - we did quite a good job on cost control this quarter, especially on the control over sales and marketing expense. I wonder, how should we look at the margin trend in the rest of this year? And do we have an updated budget on the traffic acquisition for this year? The second question - the third question is on Yidian. Can you share more color on Yidian's revenue growth on the domestic listing time line? Just to be clarified, will we hold any stake in Yidian after its domestic listing?

Thank you, Frank. Let me answer your question first. If Shuang wants to cover additional information, he will add later. So for your first question about the guidance, our - actually, our ifeng app advertising revenue increased by 43% in the second quarter. It was mainly driven by increasing of pricing and the number of advertisers. But for the rest of the year, we have confidence that the strong momentum of the app revenue will be continued. We expect the app revenue will be increased at least at par with industry at about 40%. We also have new initiatives to boost our revenue growth by creating our own IP and to use big data to enhance our algorithm for our advertisers to be placed to the users at a most relevant way. We have launched 3 IP originally last year, which potentially could become a lasting IP where we saw high demand from our brand advertise - for our brand advertisers. So including all these initiatives, for the full year, we remain very optimistic that our revenue - our advertising revenue will have a double-digit growth, as we mentioned in our first quarter earnings call. So that is for the guidance. And for the paid services, we are seeing further strengthening of the regulations regarding to the MVAS business. The telco actually placed very healthy regulations on that. So the MVAS services will be further declining at about 40% per year. That actually was very consistent with our previous expectation, so no surprise here. And as for the margin, in terms of the TAC, traffic acquisition expenses, as we mentioned earlier, it has - last year, we spent about 320 million in our TAC cost. This year, we increased about 400 million. So we have not increased our budget, but this budget should be enough for the rest of the year. So as for the margin, it will remain our expectation. As we mentioned earlier in our first quarter call, it has not been changed. And as for the Yidian revenue growth, as we mentioned earlier, in 2017, its revenue was doubled. And this year, we expect it was tripled. And this year, we expect the revenue to be doubled. And also, Yidian's DAU experience in two months as compared to April this year has increased high single digit - has experienced a high single-digit growth from 60 million. So it's very healthy and strong growth within Yidian. And as for their Asia listing plan, as we mentioned - as Shuang mentioned in his script, actually, we don't have a definitive plan for Yidian whether to be listed on Asia or overseas. But apparently, in terms for the valuation, it's better for Yidian to be listed on Asia. But nothing has been concluded. And actually, Yidian is doing its round of financing, and it's expected to be completed by the end of the year. I hope that answers your questions. Shuang, do you have anything to add?

Your next question comes from the line of Natalie Wu from CICC.

This is [indiscernible] speaking on behalf of Natalie. So can management...

We can't hear you very clearly. Can you...

Yes. Is this okay now?

Yes, better. Yes.

Yes. So I was wondering, could management share some change of future user acquisition? So given that smartphone shipment in China is slowing down recently and we are seeking more diversified channel for user growth, does management have any targets for MAU or DAU in the next year?

Yes. This is Shuang. As Betty mentioned in her remarks, actually, our total user acquisition cost for the second half of the year will remain the same - will remain unchanged. We're going to hold a very cautious approach to rigorously analyze the ROI on user acquisition. And looking forward for the second half of the year, I think we will do better. In the first part of this year, we're going to increase our investment in our content library, strengthening our algorithm-driven computing team and further recruit more talents on our algorithm team to further optimize our user experience. So our goal is to grow our flagship app, ifeng News, more robustly. In addition, we're also internally exploring new products to further increase our user base, But for competitive reasons, we cannot disclose too much. But this product will definitely focus on younger demographic. We'll play - emphasize on interaction and social networking. And looking forward in the midterm to long-term range, as we mentioned in our opening remarks, there is a possibility - there's a high possibility we're going to let the Yidian to go public domestically. So that provides us with the chance to exit our investment. So with the potential return of our investment, we're going to - also looking at opportunities to do further strategic acquisition to expand our user base, especially in younger demographic. So that's the - overall our user acquisition and user expansion game plan.

Your next question comes from the line of Binbin Ding from JPMorgan.

I have a question on your content strategy. Can management elaborate on your content strategy in this and next year? And also, a related question is your content investment. Can you give us a sense regarding the content budget in this and next year? You mentioned a few key areas of content investment, including self-media content, including documentary programs, video, et cetera. So what are the main areas to spend this budget? And what's the implication on our profitability?

This is Shuang. Yes, Thank you for your questions. I think our content strategies covers four areas. The first is our breaking news. That's where our special - our expertise lies in. Recently, breaking news kept coming on topics between international relations, economics, entrepreneurship and celebrities, et cetera. User demand for cars and reliable information - sorry, reviews and reliable information on those hot topics is emerging. So we will continue to leverage our strength in the timely capture and professional editing of breaking news and deliver the most insightful and authentic content to our users to increase our brand equity and user stickiness. We should not diminish but rather augment our strategy in professional editorial content. And secondly, our original content production. I think we recently conducted a thorough review of our original content categories. Afterwards, we have eliminated some categories with little traffic, monetization or social impact. Going forward, we will concentrate our resources in providing original content in roughly 20 categories, including culture affairs, history, fashion, finance, economics and others. We will place a greater emphasis on product innovation, monetization and multi-channel marketing of our content. Through original content production, we aim to accentuate the uniqueness of our brand, intensify users' reliance on our platforms and enhance our monetization capabilities. And third thing is our we-media. Actually, we have reorganized our we-media operation team and put new leadership in place. And we have conducted a thorough review of our we-media user accounts and remapped our course of collaboration with Yidian. We have laid out a more scientific compensation structure for our we-media content producers based on the traffic generation results. We also reinforced the coordination between we-media and various vertical channels on content production and stressing the top-tier we-media account recruitment operations and monetization in each vertical channel. For competitive reasons, we cannot quantify too much on the exact dollar amount investment in these areas, but it will be more than what we had expected. But I think this will definitely bear fruit in the mid- to long-term range, will further enhance our user stickiness and create more opportunities for monetization. And also, you mentioned our IP initiatives, our video IP initiatives. For video IP, user attention, as you all know, user attention is increasing shift towards video content, so our advertising dollars. So advertising - advertisers love to sponsor proprietary video content to promote their own brand influence. Phoenix New Media has intensive experience in producing original video content in interviews, histories and culture. So we're exploring a new form of show which has the perfect combination of elements of both talk show, reality show and interviews. This will help us to attract younger white-collar demographic. Starting this year, we have increased our investment in proprietary content production, especially in, yes, as I said, in integrating celebrity interviews, current shows and variety shows. I think because we have very solid advertiser network, we have good monetizing culture in history and celebrity interviews oriented shows. This will not - this will further increase investment in IP - video IPs will not have significant impact on our bottom line. Maybe, Betty, has anything to...

No. Binbin...

Okay. I hope this answered your questions.

[Operator Instructions]. There are no further question at this time. I would now like to hand the conference back to today's presenter. 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. Bye.

Thank you.

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