Phoenix New Media Limited (FENG) Q3 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Phoenix New Media 2018 Third Quarter Earnings 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, Tuesday, 13th of November 2018. I would now like to hand the conference over to your first speaker today, Qing Liu. Thank you. Please go ahead.

Thank you, operator. Thank you, and welcome to Phoenix New Media third quarter 2018 earnings conference call. I’m joined here by our Chief Executive Officer, Mr. Shuang Liu; 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 third 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’d like to turn the call over to Mr. Shuang Liu, our CEO.

Thank you, Qing. Good morning, and good evening, everyone. Before I discuss our third quarter’s results, let me first update you on the progress we have made in regulatory compliance. As we announced in late September, we temporarily suspended our ifeng News Mobile Application and WAP website, as well as a few of our channels, our ifeng.com, upon receiving at the special government notice. Although only a portion of our services was suspended for two weeks, our financial results and our public image were nonetheless impacted, and this impact may persist for one or two quarters. This event, the suspension was part of a broader industry-wide campaign that the government initiated in the beginning of the year to foster a healthier online environment and many media outlets received similar notices. We have moved swiftly and decisively in a series of actions to buttress our operations upon receiving the suspension notice. First, we have reinforced our general training to bolster our professionalism and tact when reporting sensitive topics. Second, we have made our content management, regulatory compliance and risk control procedures more stringent. Third, we have realigned our priorities in terms of the types of new contents we choose to cover. In our coverage of domestic current affairs, we will exercise more caution going forward, while allocating more resources to contents regarding lifestyle, finance, technology and entertainment. We believe these measures should better equip us to adapt to the evolving regulations. On the bright side, our users have expressed understanding and encouragement for the temporary setback we’re experiencing. The speed and the magnitude of which user data has recovered was better than we expected, which demonstrates our user stickiness. We are grateful for our users’ unwavering support and for their continued loyalty during this difficult period. We’re doing everything we can to restore all of our operations as quickly as possible. Traditional Chinese wisdom says, beneath every crisis lies an opportunity. We’re taking this temporary setback as an opportunity to further accelerate the expansion of our content offerings, diversify our portfolios, strengthen our content risk management procedures and make ourselves stronger and better than ever before. Now let me explain the opportunities we’re seeing in the marketplace and the strategies we have implemented to capitalize on those continuities. As mentioned during our previous earnings calls, we have been actively broadening our content library. We have diversified the range of topics we cover into a series of ever-growing, a lifestyle-oriented company in addition to our core competence in professional courage of breaking news and current affairs. In the past several quarters, we continue to allocate additional resources to building our exclusive and original content, while also investing in we-media. Our ultimate goal is to enable our users to cultivate a happy, healthy and a fulfilling lifestyle through our products. We’re confident that by combining our industry-leading news coverage capabilities with our premium brand influence and our lifestyle-oriented content strategies, we’ll be able to further expand our users and client base. In terms of talent, we have added a media industry veteran to our content operations team. As recently announced, we have appointed Mr. Liu Chun as our Senior Vice President. With over 20 years of experiences in New Media, Mr. Liu will oversee the development of our original and proprietary short video content. Mr. Liu has a long track record of producing, distributing and monetizing some of the nation’s best known TV shows, including the live interview program, [Foreign Language], A Date with Luyu, which has won multiple industry awards. We’re confident that his extensive knowledge and expertise will significantly enhance our capabilities in monetizing our proprietary video content. In fact, our investment in video content has already started to contribute to a growth in the third quarter. Video content continue to be the dominant form of content in our library surpassing audio, image and text. As we regularly registered over 100 million daily views from our videos in September, the average viewing volume of our video content has been growing from July to September at a rate of 8.3% accordingly. In particular, [Foreign Language], Atlas Power, a new variety show that was produced in-house achieved a record-breaking viewing volume of over 170 million since its release on ifeng.com on various media outlets. In order to diversify our revenue streams, we’re also ramping up our paid content, our knowledge-sharing business. Our major paid services is coming from our digital reading port, [Foreign Language], which has become an integrated component for our long-term growth strategy. Our efforts in cultivating [Foreign Language] into a disruptive growth engine have started to produce robust results in financial and operating metrics. By the end of September, [Foreign Language] mobile application has achieved robust growth in daily active user, DAU, which represents an increase of 52% compared with same period in 2017. For the content contributor of [Foreign Language], we continue to leverage our brand influence and our access to government resources to help them unlock their full potentials. One of the innovative methods we use to help our authors to monetize the full potential of their intellectual property is to create a comprehensive suite of related media content, including audiobooks, comics, films and TV serials. By leveraging our abundant content resources, we have created a paid content platform to provide audiobooks and knowledge-sharing lessons produced by KOLs. Finally, let me provide an update on the recent performance of Yidian. By the end of October, Yidian has reached a record high daily active user of 70 million and its full-year guidance remains unchanged. Regarding Yidian’s [indiscernible] financing, we have made substantial progress during this quarter. Currently, we are on track to complete the planned transaction by the end of 2018. Recently President Xi Jinping have made plans to launch a technology innovation board on the Shanghai Stock Exchange to fast track public listings of quantified Chinese technology companies, thus, opening up additional opportunities for technology unicorns such as Yidian to tap into the domestic capital markets. To summarize, our third quarter financial results was less than optimal as a result of the global macroeconomic uncertainties, more stringent local regulations, our advertisements and the temporary suspension notice from the government. Such external factors will likely have lingering impact on our financial performance for the next few quarters. Despite the short-term setback, we remain focused on strengthening our content management system, expanding our operations team and diversifying our service offerings. As a living success story of a new media business going public following its – from a traditional media group, Phoenix New Media has set a number of records in our history. While we remain cognizant of some near-term headwinds, we’re confident that we have the right strategies, as well as a very experienced and capable team in place to weather through any market condition. Just as the Phoenix rise from the ashes, we will – we too will rise better and stronger than ever before. With that, I will turn the call over to our CFO, Betty Ho, for financial updates on the quarter.

Thank you, Shuang, and thank you all for joining our conference call today. 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, which were previously presented as a component of cost of revenues are now presented as a reduction item of revenues. Some advertising for advertising partner transactions, which were previously not recognized as revenues are now recognized as revenues. For comparative purposes, here we will provide our financial highlights under the old accounting standard, ASC 605. For the amount and ratios under the new accounting standard, ASC 606, 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 third quarter of 2018. The amounts mentioned here are all in RMB, unless otherwise noted. The difference between GAAP and non-GAAP consist of share-based compensation and gain or loss from the equity method investments, including impairments. ifeng’s total revenue for the third quarter of 2018 were RMB355 million, representing a decrease of 16.6% from RMB425.6 million in the same period last year. Non-GAAP net income attributable to Phoenix New Media Limited for the third quarter of 2018 were RMB21.3 million, as compared to non-GAAP net income attributable to Phoenix New Media of RMB34.4 million in the same period last year. Non-GAAP net loss per diluted ADS in the third quarter of 2018 were RMB0.29, as compared to non-GAAP net income per diluted ADS of RMB0.48 in the same period last year. First, I will provide details on our revenues for the quarter. Net advertising revenues for the third quarter of 2018 decreased 16.1% to RMB304.6 million from RMB363.1 million in the same period last year. We’re seeing the slowdown of the macroeconomic and the tightening of the rules and regulations of the advertisement on certain specific industries, especially on games, financial services and health products, which affected the whole advertising industry. In addition to that, we have also experienced a 14-day suspension starting from September 26. This all have contributed negative impact on our advertising income. Paid services revenue for the third quarter of 2018 was RMB50.4 million, compared with RMB62.4 million in the same period last year. Revenues from digital entertainment were RMB31.9 million, compared with RMB52.6 million in the same period last year, which was due to a 65.6% decrease in the MVAS revenues, mainly resulting from the decline in users’ demand for services provided through telecom operators in China, while digital reading have been increased by 14.2%. Revenues from games and others for the third quarter were RMB18.5 million, representing an increase of 88.9% from RMB9.8 million in the same period last year, which was primarily attributable to the revenues generated from licensing, Adventure in the skies, [Foreign Language], a martial arts literature IP owned by the company to a film production company. Non-GAAP gross profit for the third quarter of 2018 was RMB174.3 million, compared with RMB238.3 million in the same period last year. Non-GAAP gross margin for the third quarter was 49.1%, compared with 56% in the same period last year. Non-GAAP content and operational costs as a percentage of total revenue was 34.4%, as compared to 25.7% in the same period last year. Revenue-sharing fees as a percentage of total revenue was 4%, as compared to 6.6% in the same period last year. Bandwidth costs as a percentage of revenue was 4.1%, as compared to 3.3% in the same period last year. Sales taxes and surcharges were RMB29.6 million for the third quarter of 2018, as compared to RMB35.7 million in the same period last year. Non-GAAP operating expenses for the third quarter were RMB231.3 million, as compared to RMB200.4 million in the same period last year. Non-GAAP operating loss for the third quarter was RMB57 million, as compared to a non-GAAP operating income of RMB37.9 million in the same period last year. Non-GAAP operating margin for the third quarter was negative 16%, as compared to positive 8.9% in the same period last year. Net loss attributable to ifeng for the third quarter was RMB19.6 million, as compared to RMB32.9 million in the same period last year. Non-GAAP net loss attributable to ifeng for the third quarter was RMB21.3 million, as compared to RMB34.4 million in the same period last year. Non-GAAP net loss per diluted ADS for the third quarter was RMB0.29, as compared to non-GAAP net income per diluted ADS of RMB0.48 in the same period last year. Now I will discuss our balance sheet. As of September 30, 2018, the company’s cash and cash equivalents, term deposits, short-term investments and restricted cash were RMB1.42 billion, or approximately US$206.9 million. Restricted cash represents deposits placed as 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 fourth 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 to be between RMB414.2 million and RMB437.2 million, representing a decrease of 10.3% to 5.3% year-over-year. For net advertising revenues, we are forecasting between RMB374 million and RMB392 million, representing a decrease of 8.9% to 4.5% year-over-year. For paid services, we are forecasting between RMB40.2 million and RMB45.2 million, representing a decrease of 21.6% to 11.8%. We are experiencing a major correction on macroeconomics in China, and we expect it will prolong for a period of time. Thus, we will be facing very challenging years ahead. However, we are taking necessary initiatives and measures to expand our revenue streams to pay content services to enrich our content production through IP and short real production to increase our product offerings to broaden our user base. As a result, we will continue to invest on our content offerings to investing on we-media content, creating more culture our top show-related IPs and short videos and adding paid products on audio novels and knowledge payment, et cetera. This concludes the prepared portion of our call. We are now ready for questions. Operator, please go ahead.

Thank you, Betty. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Frank Chen from Macquarie. Please ask the question.

Hi, Shuang. Hello, Betty, thank you for taking my question. I have two questions. The first one is about our new initiatives. In the press release and prepared remarks, you had mentioned multiple times that you are going to diversify the growth drivers going forward. And do you – you mentioned the lifestyle-related verticals during the past two quarters. Can you elaborate more about that and our revenue outlook you invest in new initiatives? And second is about our core advertising business. You mentioned earlier that the outlook for next year is very challenging. I want to – can you share with me more about how you think of the core ad business outlook into next year amidst the slowdown in macro? Thank you. That’s all my questions. Thank you.

Okay. thank you. This is Shuang. Let me answer your first question. Vertical area is definitely the important area we’re going to focus on. As President Xi Jinping pointed out in the 19th Congressional Report, to meet the people’s desire for happy life is our mission. As consumption upgrade accelerates, more opportunities emerge in the industry vertices, especially in mobile-based verticals. Phoenix New Media has accumulated unrivaled vast customer base in verticals, especially in auto, finance, technology, fashion and real estate area. So we have consistently ranked the top traffic generator on the PC platform. So next stage of our strategic focus is how to marry our immense traffic on our premium brand with our extensive advertising network to capitalize on emerging opportunities in each of the lifestyle verticals. One of our strategy is to enable the Chinese consumer to cultivate a happy lifestyle. We aim to build an ecosystem evolving around the middle-class desire to become very important in both aspects of life, including food, clothing, home décor, travel, healthcare, parenting and so on. As we potentially collect the return on investment in Yidian, we plan to accelerate our ecosystem development through a combination of potential acquisition with organic growth and innovation. We will expand our business model to encompass e-commerce and service-based transaction fees in addition to page view-based advertising fees. So that represents a major shift of our future business model. But at the present date, it’s hard to quantify the exact revenue stream going forward. In constructing our company for each lifestyle verticals, we’ll not only leverage our own apps, allow distribution channels on Weibo and WeChat, but also actively expand also third-party platforms. So that we can satisfy our users’ demand for service beyond information gathering. We will target the upper-end and middle classes, anchor our foothold in a few key verticals such real estate, finance, fashion and engineer innovative products and device original monetization matters. In the next – in the coming months, we’re going to recruit new talents, new team with a focus on fashion and entertainment areas. We’ll not only rely on our own platforms, we’re going to make it a content-driven and fee-based model. So that, that will jumpstart our initiative on vertical areas. I hope this answers your question. Betty?

Hi, Frank, this is Betty. Let me address your second question. The decrease of advertising revenues in the third quarter, as you know, was mainly due to the slowing down of the macroeconomics, which led to a cut of advertising budgets; and the tightened regulations of the advertisements on medical and health products, gaming and financial services, et cetera. And these are in addition to the five-day suspension in late September within the total of the 14-day suspension. And the suspension impact, we understand that it will continue through the first 10 days of the fourth quarter and we expect a tightened regulation of the advertisements and the slowdown of the macroeconomics will prolong. As a result, we expect our advertising income for the full-year will be flattish or slight increase –or slight decrease. As we expect, the restrictions on the specific industry on advertisements and the slowdown of the macroeconomics will prolong, we are unable to provide a 2019 outlook due to too many uncertainties.

Okay. Thank you. Thank you, Shuang and Betty. Very helpful.

Thank you, Frank.

[Operator Instructions] Your next question comes from Binbin Ding from JPMorgan. Please ask your question. Binbin has removed the request. We will continue on with the next question. And your next question comes from Li Chuck from First Shanghai securities. Please ask your question.

Hello, management, [indiscernible] from First Shanghai Security. I have one question. During the third quarter, your webpage has been published by the office of the Central Cyberspace Commission and it stopped operating for around a month or suspended business. So are you the only one punished? And how do you see the ecosystem of Internet-use websites? Thank you.

Hi. Thank you. This is Shuang. The recent suspension was the most severe penalty that we have received in our company’s development. However, we’re not the only one singled out for this penalty. Early this year, many popular live streaming and media ATPs were actually taken down. We’re one of the several Internet companies to have received suspension notices. These suspensions are part of the sweeping regulatory campaign to clean up Internet content. Our users understand the regulatory challenges we are facing and have conveyed their loyalty and support towards our brand through their uninterrupted usage of our product. Our operating later has recovered better than we had expected. More strict regulations we’re seeing our projection of the media industry trend, because we are one of the most influential news media outlet in China, we take the responsibility to cooperate with the government and to stay compliant with regulations. I think, we will continue to strengthen our Internet content review process. We’ll be more prudent in our news coverage of current affairs. We also firmly believe that more regulatory oversight will foster healthy development for the entire media industry. This will also benefit professional content providers like us in the long run. Thank you.

[Operator Instructions] Your next question comes from Binbin Ding from JPMorgan. Please ask your question.

Thanks, management, for taking my question. Apologies, I was cut off just now. My first question is regarding your video and contest strategy. So can management elaborate your video strategy, especially after the appointment of Liu Chun to oversee our video business. And you mentioned Mr. Liu’s focus will be on the development of short video content. So how does our short video initiative differentiate from other platforms? And what kind of synergies shall we expect from our origin news content and short video content? My second question is housekeeping question on your top advertising categories and their revenue contribution. I understood you’re not able to provide a very detailed outlook to 2019 outlook, but can we share some initial feedback from advertisers while we negotiate with them on the annual contract for 2019? Thank you.

Hi, this is Shuang, let me answer your questions regarding video. We believe that video will be one of the essential trends of online content. Phoenix New Media has a strong brand influence. We have a competitive advantage in the categories of cultural content and Internet programs. We have chosen not to break into the video market through in-house produced TV drama or variety shows. Instead, we have found out our own reach. We pioneered new programming formats through the combination of culture, interviews, core discipline, and reality shows. It’s a new format. It’s different from the current popular – other popular forms. Our pan-culture and pan-entertainment concept is in sync with the broader industry trends. It also appeals to the younger demographic. Specifically, this kind of modeling also has been proven by our – the latest show, [Foreign Language]. While we remain prudent in our cost control, we’ll differentiate ourselves through our ideas, creativity, understanding of consumers and ability to grasp the current political situation. Liu Chun was appointed as our Senior Vice President, actually signifies our commitment to the video content. He brings on board not only his own expertise, but also a team of veterans to improve our production, distribution and monetization of video content. As to short form video – short video, there’s two fronts we’re going to focus. One is the Phoenix TV content library. Phoenix TV in the 20 years has produced many popular talk show, documentary and celebrity interviews. So it’s a – it’s good money for us to leverage. But in the past, we haven’t done a good job in packaging it. We make it a tailor-made product to target our middle-class users. That’s something we’re going to improve and catch up. The second area is short form video covering international affairs, especially the culture, travel, lifestyle rating areas. Phoenix TV has more than 50 stations overseas, has a big team of professional reporters. So – but as you know, the TV primetime is quite limited. So there’s a huge opportunity for us to leverage this professional team to strengthen our coverage of international affairs, especially on the, call it, tourist destinations, like Paris, like Milan, like Rome, London, Tokyo, all these places we have branch office there. We have journalists there. So they will help us to cover the breaking news and also the high-profile exhibition, fashion show and local culture events. This will further diversify our content offering by strengthening our user stickiness. So that these are two fronts. We’re going to strengthen in a going – going forward short form video business.

Hi, Binbin, let me tell you – let me answer your second question. Our top five advertising categories are being auto, food and beverage, e-commerce, Internet services and financial services. Among all, our auto category has been always – among all has always been the biggest category out of all these five categories. And it has been – always been our top categories for the past quarters. And for the food and beverage, mainly this quarter is coming from wine industry, as compared to before it may also coming from food and beverages. But this quarter, particularly in this category, our wine business has been doing very well. In terms of 2019, we believe the macro condition has just started and it will continue to the next year. We are seeing cutting of – cutting budgets from our advertisers and with the intensified competitions, we believe it will be very challenging in 2019. So, as I said, I – we aren’t able to quantify a number now because of – there are too many uncertainties.

Understood. That’s very helpful. Thank you.

Thank you, Binbin.

[Operator Instructions] Your next question comes from [indiscernible] Security. Please ask your question.

Hello. Thanks for taking my question.

Hi.

Hi.

Would you like give us more information about Yidian. How many users and how many that the browser channel contributed? And the second one is, should we expect the same challenging situation for Yidian for the next year? Thank you.

Hi. Let me take the first cut and then Shuang can supplement if I miss anything. Yidian has over 70 million users as of this month. And actually, its revenue guidance has remained unchanged. Last year, it was about RMB1.5 billion in terms of revenue and this year we are still expecting it to be doubled and is on the right track. And your second question regarding Yidian was?

I mean, the guidance for the next year for Yidian?

Oh, we haven’t provided any guidance at this point yet. But this year’s revenue guidance is to be doubled as of last year at about RMB3 billion revenue.

Okay. Thank you.

Thank you.

Thank you. There are no further questions at this time. I’d now like to hand the conference back to the management for 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.

Thank you. Bye.

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