Phoenix New Media Limited (FENG) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to today's Phoenix New Media 2018 Fourth Quarter and Fiscal Year 2018 Earnings Call. [Operator Instructions]. 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 Fourth 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 fourth quarter 2018 financial results and webcast on this conference call are available at ir.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 apply 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. Our fourth quarter results were marked by resilience, recovery and progress. First and foremost, our fourth quarter financial results beat the high end of our previous guidance despite the myriad of challenges we encountered throughout 2018. As you all are aware, regulations governing online companies are becoming increasingly stringent. We believe that proper regulations help foster a healthy Internet environment and promote a harmonious Chinese society. As a leading news media company, we have adapted to and continued to evolve with the new regulatory environment. We're happy to report that user activities across all of our platforms have recovered almost to the level prior to the temporary setback we experienced between late September and early October. Most notably, by the end of December, our ifeng news app daily active user count has recovered to pre-sanction levels. The velocity at which our user data has recovered once again demonstrates our high products business and the loyalty shown to our brand from our user base. Our successful recovery and our resilience in the face of macro challenges is a testament to our unwavering commitment to high quality and differentiated content as well as our prudent diversification into lifestyle verticals. As for our content strategy, we continue to differentiate ourselves from our peers by focusing on enhancing our brand influence through nationwide events, producing proprietary video content based on our own IP and refining our We-media operations. Regarding our branding initiatives, we remain committed to our long-term efforts in poverty, relief and charity. In the fourth quarter, we organized our annual ifeng Beautiful Childhood Charity Gala, which raised over RMB33.6 million for our partner foundations. Others, such as the 40th Anniversary of Reform and Opening-Up 2018 Financial Summit. Our coverage of the summit, especially the keynote addresses from many industry leaders, was very well received by our users. In addition, we also held our 7th Annual China Auto Awards ceremony. During the event, more than 250,000 users loaded on favorite automobile auto manufacturers and models in over 20 categories. Going forward, we'll continue to utilize offline events, including large-scale forums and industry awards to enhance the credibility of Phoenix New Media among both our users and advertisers. On the development of our proprietary IP on video, we've made a push into short form videos in early 2018 and have been gaining steady traction since. In the fourth quarter, our original variety shows, Endless Power, [Foreign Language], accumulated over 340 million views, doubling that of the previous quarter. Endless Power is one of the many in-house productions that received widespread viewer recognition, critical acclaim and advertiser endorsements. Other examples includes, A Journey Through Literature, [Foreign Language], which was viewed over 100 million times in November alone, and the Super Trump, [Foreign Language], which was aired in January 2019. More importantly, we have an administrative system in place to constantly, precisely and diligently control the ROIs for all of our in-house production during the fourth quarter. Going forward, we will continue to invest in video content through both short form video productions and IP creations. We believe IP creation video content will be a vital growth driver for us moving forward. For We-media, we have significantly improved its operational efficiency by strengthening its coordination with our vertical channels, leveraging the industry insights, network and connections that we have established in various industries and vertical channels. We are much more effective at identifying high-quality content that We-media offers in each niche verticals. We have implemented attractive incentives for content creators based on the number of paid views and advertisement impressions to encourage higher-quality content production. As for our coverage of hot topics, as we utilize our knowledge and network context in various verticals, we are more sensitive and perceptive of emerging events than ever before. We are also able to categorize events based on their level of significance so that our smart algorithm can maximize our distribution efficiency. Our editorial team is now playing a crucial role in the premium content collection and recommendation process. The distribution of premium content is key to maintaining our superior user experience. Recognizing its importance, we have implemented a complete set of guidelines and KPIs for our teams in various vertical channels. We believe that humans are much more reliable and accurate than algorithm when it comes to determining the quality, credibility and authenticity of premium content, especially when the review is conducted by our experienced editorial team. The combination of emerging events, coverage and premium non-time-sensitive events distribution has allowed us to ensure an optimal experience for our users and further solidifying our unrivaled influence in the media center. Now I would like to give you an update on our content diversification into the lifestyle vertical channels. So just on content production capabilities, we have put on board a team of media veterans with over 10 years of experience to replicate our past success with key lifestyle verticals, including entertainment, food and fashion. We are pleased to announce that we have attracted top talents in this area and have attracted notable top class We-media content creators and key opinion leaders in cosmetics, clothing, delicacies, vintage wines and other related topics and added them to our network. As a result, our capacity to produce more original high-quality content in these areas has expanded substantially. As for our food vertical, we are now producing food documentaries, mini-variety shows and award ceremonies, billboard publications, daily short form videos, daily new media publications and frequent offline social gatherings. Above all, our lifestyle content is seamlessly integrated with a variety of e-commerce business, each of which is customized to match the industry style of online celebrities, thus, enabling us to monetize our vast and growing user base. Now let me give you an update on our recent strategic investment in the online reading segment. In 2018, we focused on cultivating our online reading product, Fanyue, as a vital part of our content strategy and an essential growth engine for FENG. In late December, we announced we made an investment in Tadu, which is one of the most popular online reading applications in China, with over 1 million daily active users. After we exercised our option in late December, we have started to consolidate Tadu into our financial statements and its revenue will be accretive to us. Tadu and Fanyue are highly complementary to each other. Tadu's strength is technology development and distribution capability, while Fanyue's strength is its content production and extensive content library. By integrating Fanyue with Tadu, we offer users a full-fledged online reading experience. More importantly, we have laid a solid foundation for building our own closed loop IP ecosystem, a system encompassing writer creator contracting, original content production, content distribution and content monetization. We're cultivating these contents into online series, comic books and/or audiobooks, et cetera. One of the very successful comic books, Marriage and Love Junkie, [Foreign Language], being 1 of the 8 comic books that we produced this quarter, achieved over 300 million views. In audiobooks, Blood Pilot, [Foreign Language], was named the top new audiobook by one of the most popular online audio applications. Going forward, we expect that the synergies between Fanyue and Tadu will further expand our user base and strengthen our capability in IP development. Finally, I will share an update on Yidian. As of January 31, 2019, Yidian's daily active users reached 74 million for the full year of 2018. Yidian's revenue almost doubled from the prior-year period. Yidian also actively expanded its partnership with leading Chinese content manufacturers, including Vivo and OPPO. In late February, we entered into binding letter of intent with the proposed buyer for the sale of 32% of the total outstanding share of Yidian. The agreement is carefully scheduled to be completed before March 22. Although it is still subject to certain closing conditions, we expect the sale to result in the total of $448 million in cash. This means that we have generated a significant return on our previous investment in Yidian. Meanwhile, our remaining 5.63% interest in Yidian will allow us to continuously benefit from its future growth. Most importantly, the cash injection from the deal will help fuel our own growth engines as well as expand our product and content offerings through potential strategic investment opportunities. In summary, we have showcased our resilience to overcome the challenges in 2018 and executed strategic initiatives to benefit our long-term growth. We have achieved great success in company enhancement, business diversification, technology development and strategic investment. Although the slowdown in China's economic growth inevitably impacted our advertising revenues and although the industry-wide budget cuts that we saw last year may last for a few more quarters in 2019, we are meeting these challenges head on by diversifying into more countercyclical lifestyle verticals. Also as we consolidate Tadu, we believe it will become an important driver for our long-term growth going forward. We're confident that despite the macro headwinds, our strong brand equity, loyal user base, vast content repository, advanced technology capabilities, diversified business segments and increasing monetization value will all enable us to weather through the challenging market conditions and deliver long-term value to our shareholders. With that, I will turn the call over to our CFO, Betty Ho, for a financial update of the fourth 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 elaborate on the impact of the newly adopted accounting standard ASC 606, namely, revenues from contracts with customers which took effect from January 1, 2018. By applying the modified retrospective method under the new standard, some charges 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 prior 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 financial items under both the prior accounting standard and the new accounting standard. Now let me take you through our financial highlights for the fourth 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 method investment net of impairments. Ifeng's total revenue for the fourth quarter 2018 were RMB434.1 million, representing a decrease of 6% from RMB661.8 million in the same period last year. Non-GAAP net loss attributable to Phoenix New Media Limited for the fourth quarter of 2018 was RMB36.2 million as compared to non-GAAP net income attributable to Phoenix New Media of RMB11.6 million in the same period last year. Non-GAAP net loss per diluted ADS in the fourth quarter was RMB0.5 as compared to non-GAAP net income per diluted ADS of RMB0.16 in the same period last year. First, I will provide details on our revenues for the quarter. Net advertising revenue for the fourth quarter decreased 5.3% to RMB388.7 million from RMB410.5 million in the same period last year. The decrease was mainly due to the 14-day suspension, starting from September 26, which mainly affected Q4. In addition to that, we are also experiencing the cutting of advertisers' budget due to economic downturn. Paid services revenue for the fourth quarter of 2018 was RMB45.4 million compared to RMB51.2 million in the same period last year. Revenues from digital entertainment were RMB31.6 million compared with RMB39.5 million in the same period last year, which was due to a 23.2% decrease in the MVAS revenues mainly resulting from the decline in users' demand for services provided through telco operators in China. Revenues from digital reading decreased by 15.5% compared to the same period last year, which is mainly due to the tightening regulations in China regarding online digital reading content and the impact of the 14-day temporary service suspension. Revenues from games and others for the fourth quarter of 2018 were RMB13.8 million, representing an increase of 17.2% from RMB11.7 million in the same period last year. In late December, we have invested into Yitian Xindon or Tadu, and we are able to consolidate its financial statements for the three day period from December 29 to December 30 -- 31, 2018. The revenue of Yitian Xindong for the three day period was RMB1.1 million, which was included in the consolidated paid service revenues. Non-GAAP gross profit for the fourth quarter of 2018 was RMB219.3 million compared with RMB254.3 million in the same period last year. Non-GAAP gross margin for the fourth quarter of 2018 was 50.5% compared with 55.1% in the same period last year. Non-GAAP content and operational costs as a percentage of total revenue was 34.9% as compared to 30.8% in the same period last year. Revenue sharing fees as a percentage of total revenue was 3% as compared to 2.7% in the same period last year. Bandwidth cost as a percentage of revenue was 3.3% as compared to 2.8% in the same period last year. Sales, taxes and surcharges were RMB35.8 million for the first -- for the fourth quarter of 2018 as compared to RMB39.9 million in the same period last year. Non-GAAP operating expenses for the fourth quarter of 2018 were RMB252.3 million as compared to RMB255.1 million in the same period last year. Non-GAAP operating loss for the fourth quarter was RMB33 million as compared to a non-GAAP operating loss of RMB1 million. Non-GAAP operating margin for the fourth quarter of 2018 was negative 7.6% as compared to negative 0.2% in the same period last year. Net loss attributable to ifeng for the fourth quarter of 2018 was RMB36.8 million as compared to net income attributable to ifeng of RMB11.8 million. Non-GAAP net loss attributable to ifeng for the fourth quarter of 2018 was RMB36.2 million as compared to RMB11.6 million in the same period last year. Non-GAAP net loss per diluted ADS for the fourth quarter was RMB0.50 as compared to RMB0.16 in the same period last year. Now I will discuss our balance sheet. As of December 31, 2018, the company's cash and cash equivalents, term deposits and short-term investments and restricted cash were RMB1.36 billion or approximately $197.3 million. Restricted cash represents deposits placed as security for banking facilities granted to company, which are restricted as to their withdrawal or usage. Let me briefly run through the key figures for fiscal year 2018. Total revenues for 2018 were RMB1.5 billion as compared to RMB1.58 billion in 2017. Net advertising revenue decreased by 3.4% to RMB1.31 billion from RMB1.35 billion in fiscal year 2017, primarily due to the decrease in PC advertising revenues, which was partially offset by the 28.9% year-over-year growth in mobile application advertising revenue. Total fiscal 2018 non-GAAP gross profit decreased by 8.5% to RMB780.2 million, which represents a 52.2% non-GAAP gross margin as compared to 54.1% in 2017. Non-GAAP operating loss for 2018 was RMB111 million as compared to RMB35.8 million in fiscal year 2017. Non-GAAP operating margin for 2018 was negative 7.4% as compared to positive 2.3% in 2017. Non-GAAP net margin for 2018 was negative 3.7% as compared to positive 3.3% in 2017. Non-GAAP net loss attributable to ifeng for 2018 was RMB54.6 million or RMB0.75 non-GAAP net loss per diluted ADS. Lastly, I'd like to provide our business outlook for the first quarter of 2019. We are forecasting total revenues to be between RMB254.8 million and RMB274.8 million, representing a decrease of 10.6% to 3.5% year-over-year. For net advertising revenues, we are forecasting between CNY 193.8 million and CNY 208.8 million, representing a decrease of 20.4% to 14.2% year-over-year. For paid service revenues, we are forecasting between CNY 61 million and CNY 66 million, representing an increase of 47.1% to 59.2%. We are experiencing a macroeconomic slowdown in China and is expected to persist for some time, resulting in near-term headwinds. However, we are implementing measures and initiatives to actively combat these challenges by enhancing our revenue streams from online reading services, upgrading our original content production capabilities and expanding the scope of our product offerings to a broader user base. As we continue to augment and diversify our content, we will further invest in our offerings, including We-media content, while also creating more original culture and lifestyle oriental -- lifestyle-oriented talk shows. In addition, we will introduce more short video content, along with paid products such as digital reading, audio novels and et cetera. We are confident that these initiatives will enable us to go back to growth cycles, that our total revenue is expected to be increased by over 20% in 2019. This concludes the prepared portion of our call. We are now ready for questions. Operator, please go ahead.

[Operator Instructions]. And our first question comes from the line of Frank Chan from Macquarie.

Congratulations on realizing the investment return on Yidian. I have a couple of questions now. And the first one is on the proceeds. Could management share with us more color on your plan with the proceeds from disposing Yidian? And the second one is for our core portal business. What's the strategy, especially on your mobile app, ifeng mobile app? And how should we think of completion? And to the -- Betty mentioned that we are expecting a 20% year-over-year increase in revenue. Could management also share some outlook on the portal advertising revenue in 2019? And the third one is for online reading. We noticed that there are several emerging players in this industry like Meituan, Dalian Shang we're growing very fast in 2018. They offer free online reading service and monetized through advertising. China Literature is going to launch their free product in the second quarter. And I wonder if management could share some thoughts on our online reading business and our strategy and business model going forward? The last question is on the lifestyle initiative. Could management share with us more color on the user base on this lifestyle verticals? How many DAUs or MAUs do we have on the entertainment or food verticals and to the [indiscernible] the user growth? That's all my questions.

Yes, you did ask a lot of questions. Let me try to address your questions. First, regarding the use of the proceeds of the -- of Yidian. Yes, as you said, we have entered into a letter of intent with the potential investors. Yidian has proven to be one of the most successful investments we have made in the past several years. We are especially proud of generating a handsome return on investment within that three years. So as for dividend policies, we believe that this -- 10% of all trans inter-companies have paid dividends in the past. Those who adopt a dividend policy are mostly engaged in the gaming business and are profitable. For us, we're still in a transition period and expect to continue generating loss in the near future. So when we think about the use of proceeds and also dividends, on one hand, we want to share the return on investments with our investors and shareholders. But more importantly, we are thinking about the best ways that we can utilize the capital to strengthen our core competence. The key areas that we are focusing on includes enhancing our AI capabilities, expanding our content library, accelerating our user base, hence, improving the monetization capabilities of our app, strengthening our brand influence and also exploring more investment opportunities in new markets, in a similar fashion to our investment in Yidian, which are also complementary to our brand and existing business. So in fact, we already have identified a few key targets, and we'll definitely keep our investor updated on our progress. So this about Yidian, the use of proceeds on Yidian investors. Your second question is about our new media apps. Our goal is to make our app one of the leading news app in China. I think the strength of this product lies in our deep understanding of user media consumption behavior and the collaboration between our editorial capabilities and our AI capabilities. And our efforts on all fronts, on the We-media front, our recent focus has been contemplating in the following areas. Firstly, we expand our We-media operations. We are focusing our efforts on the top-performing We-media accounts, specifically on the improvement in viewership and interaction with their followers. Second, we are reassessing readings to our top-performing We-media accounts. We also leverage the synergy between our expert editorial team and our smart algorithm to ensure the accuracy of our reading system. In addition, we are implementing a new Yidian-based incentive plan, along with our current fixed revenue sharing structure, to further encourage high-quality creation for our content producers. And certainly, we are strengthening the synergies and coordination between our We-media department and our vertical channels. The close collaboration will allow us to effectively identify and evaluate the premium resources in each vertical space so that we can maximize the efficiency of our We-media expansion. And also, as for the collaboration between our AI algorithm and our editorial teams, we are focusing on two key areas. First, our coverage of hot topics. We now have much more detailed operating guidelines. We also improved the collaboration across different channels, and we have established news trends strategies to enhance the depth of our coverage of hot topics, the distribution of content and the synergy with our algorithm. We aim to expand our premium content. We have introduced clear intentions and more specific KPIs for each of our channels to ensure that our editorial team can effectively identify premium content on a daily basis. Then we can utilize our algorithm to improve distribution efficiency. And also, we have -- on the user base expansion front, we will pay particular attention to the ROI as I have said in our opening remarks, I mean, the ROI for our user acquisition efforts, we will terminate channels with low ROIs and carefully monitor the cost of our user acquisition to improve the efficiency of our user base expansion, and also, on the content reviewing and product development and we'll have new plans, but it's still in the process of formation. I'll keep investors updated. As to our efforts on lifestyle-related areas, right now, we don't have a plan to develop independent apps. Basically the map, the effort is to beef up the content reserve on lifestyle-related areas. Like I said in my opening remarks, food, beverage, vintage wine, travel, luxury goods, stuffs like that. That will address the main focus of middle class because there's very high demand for that -- for high-quality content in lifestyle-related areas. So we're going to come up with plans to fully address their demand in these areas through short form video, offline activities and industry awards and divisions and celebrity interviews. So this will also mark the strategic shift from our focus on the front tier, also to the lifestyle-related content. Betty, you might want to...

Yes, Frank, this is Betty. With regards to your question on online reading strategy, we understand that the online reading market is very competitive with the competitors that you mentioned earlier. Our strategy is not to going to be -- to have a head on competition with them. Our positioning is to operate as a closed loop IP ecosystem. By combining the Tadu and our own mobile application, Fanyue, we believe that we will create synergies between two. Tadu, as mentioned earlier, is -- their strength is in technology and distribution; and our own Fanyue's product strength is on brand and content. So by combining these two, we are confident that we can create a closed loop of the IP operations. Meaning, that for Fanyue, we are going to attract very quality -- a lot of quality writers, and then through Tadu, we can distribute to our users. And on the other hand, in terms of IP extension, we are -- we have already extended to providing film and TV series to audiobooks, through comics, et cetera. So these are all -- this will create a closed loop for our own ecosystem, which what we are positioning at the moment. And in fact, our Fanyue applications has increased by 2x in terms of revenue in 2018, and our IP operation's revenue has increased by 3x in 2018. And by combining Tadu's distribution and technology, we believe that in the coming years, we are going to have a very strong growth period.

Our next question comes from the line of Chuck Li from First Shanghai Securities.

This is Carmen on behalf of Chuck. My question is regarding your original video. Could you elaborate the strategy and focus on how much are you going to invest and how should we expect the revenue from it?

This is a Shuang. Let me answer your question. The demand for video content from online users is enormous and the competition to produce successful online original series and variety shows is very -- obviously very intense. So the hypercompetitive environment forced us to adopt a video strategy that differentiates us from the competition. In the past, we have accumulated extensive experience in producing history, culture and interview shows. I think we will still leverage this experience to implement the format of variety shows into our culture-related shows and celebrity interviews to create more online series based on our own IP. And also, we will engage in constant communication with our advertisement sponsors during every step of our content production process. We'll not proceed with any capital-intensive production without first securing a sure endorsement from advertisers. So in terms of capital spending, we take a relatively cautious approach. We are sensitive to ROI. The core -- we believe the core competitiveness of our original video content production originated from our AV team with both industry-leading talents such as the former Executive Director from Phoenix Satellite TV, Liu Changle, and the primary producer of award-winning live interview program, [Foreign Language]. We also accumulated an extensive network of resources in the domestic television space and evaluate insights into the development of live interviews and hiking reality shows. I think we will strive to achieve breakthroughs in media content with our ability to create and present videos in innovative ways which we believe will differentiate us from our peers and the competition. But from a competitive point of view, we, at the present day, we cannot qualify too much out. Thank you.

[Operator Instructions]. And our next question comes from the line of Justin Neville From Calyx Advisors [ph].

So just to clarify from what Shuang said before, did you guys -- did he say that you are definitely not planning on issuing any kind of onetime special dividend from the sale of Yidian?

No, no, we didn't say that, we didn't say that. We did not say that. I said we are still -- our primary focus will be on -- because we are -- in the next two years, we're going to still generate loss and we're going to expand our AI capability and content library, and we're still looking at some other investment opportunities. But we definitely want to share our investment return with our investors. That's for sure.

So you are considering a dividend?

We are considering it. We are considering it, yes.

Okay. Okay. I mean, because I think the way I look at it and I guess the way other shareholders probably look at it, your job as CEO and the board to be proper stewards of capital and make some proper capital allocation decisions, I'm sure you agree.

Yes.

And as it stands right now, you have about 600-and-something-million dollars after this deal closes. I don't think you need anywhere near that much capital to run your business and invest for growth. So even if you considered half or less than that just for a onetime dividend, it seems to me that it would make sense, especially given that the market doesn't seem to be giving you guys any benefit of the doubt or value for your current operations, right?

Okay. Thank you. Yes. We are -- yes, we are -- we definitely are considering issuing special dividends, but we are also striking a balance between our future strategic investments and the operating challenges and also the need to share our investment return with our shareholders. That's for sure.

[Operator Instructions]. All right, and our next question comes from the line of Binbin Ding from JPMorgan.

I have a question on your digital reading strategy. I'm not sure this question being asked or not. Because generally, there's a lot of debate on the paid reading and free reading business models, and we've seen a lot of the new players entering the digital reading market. So can you just elaborate on the increased hours spent in Tadu and I would like to share your thoughts on your strategies on how to monetize Tadu in the mid to long run.

Binbin, this is Betty. Actually, Frank just asked that and I have answered it. But in short that be rest assured that we are not going to have a head-on competition with those big players in the market. Our positioning is to be operated as a closed loop IP ecosystem. We're riding on the brand and content capabilities of ifeng itself and also Tadu's strength on distribution and technology, we believe we are able to attract a lot of -- a lot more quality writers, and then based on their distribution technology, we are able to expand our original content to not only books, but also to films, TV series, audiobooks and also comics. By diversifying into those products, we are going to operate as a closed loop IP ecosystem. In this way, we believe that we can -- that will sustain our growth in the future. In fact, our own mobile app from our Fanyue application, the revenue has been increased by 2x in 2018 and our IP operations has been increased by 3x, and we believe that it will continue.

There are no further question at this time. Please continue. Thank you.

Thank you.

Thank you, all.

And that does conclude our conference for today. Thank you for participating. You may all disconnect.