Phoenix New Media Limited (FENG) Q2 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Phoenix New Media 2019 Second 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, the 13 of August, 2019. I would now like to turn the conference over to your first speaker today, Ms. Qing Liu. Thank you. Please go ahead.

Thank you, operator. Welcome to Phoenix New Media’s second quarter 2019 earnings conference call. I’m joined here by our Chief Executive Officer, Mr. Shuang Liu; and Chief Financial Officer, Ms. Betty Yip Ho. On today’s call, management will provide us with a review of the half year results and then conduct a Q&A Session. The second quarter 2019 financial result and webcast of this conference call are available on our website at ir.ifeng.com. A replay of the call will be available on the web site in a few hours. Before we continue, I would like to refer you to our safe harbor statements 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. In a macro environment full of uncertainty, we have held steady fast onto our commitment towards continuing goods and business evolution. Our AI powered content recommendation combined with seasoned editorial curation has constantly delivered highly engaging premium content as well as optimal user experience. Although our evolution as a New Media company is by no means lenient, we have been able to accomplish meaningful progress through the series of small steps. During the quarter, we continuously worked towards refining our content production capabilities, augmenting our premium brand equity and expanding our innovative monetization systems. Furthermore, we expanded our new initiatives in lifestyle verticals and other areas to explore promising future business opportunities. As a result of our efforts, our total revenue surged 38.7% sequentially and exceeded our own guidance. In regards to ifeng, key operating metrics of our flagship news app has steadily increased as a result of our integration of AI technology and editorial expertise. Such integration has effectively improved our content quality, optimize our distribution efficiency and increased our user stickiness. In addition, we enhanced ifeng’s user interface by carefully refining its landing page design and feature page layout. Consequently, ifeng’s user retention rate has improved gradually, starting from a steadily improved operating metrics and positive user feedback and leveraging our unique combination of advanced software algorithm with professional editorial adjustment, we’re confident that not only our user traffic will flourish, but also our revenue will grow consistently over the next two years. Step by step, we’re laying a solid foundation for diversifying our service offerings and monetizing of our premium content. For advertisers, we have expanded our advertising inventory, modified our advertiser page interface and refined our campaign optimization. These improvements, along with the launch of additional news columns, such as 24-hour news, has further improved our daily inventory fee rate. Advertisers are continuously attracted to our platform for our pervasive brand stickiness. To capitalize on our brand equity and growing user traffic, we continue to augment our brand advertising solution by organizing high profile branding events. For example, in June, we co-hosted the 2019 China Liquor Industry Summit with Moutai Group and live streamed the event. Expert discussions on the healthy development of China’s liquor industry and commercial potential of Chinese liquor attracted 3.93 million views on our live streaming channel feng.live. In addition, we worked extensively to localize our media resources in 21 different local markets, to expand our brand awareness across China. Through our partnership with local news media, we staffed our operation with local talents, customized our advertising solutions to local demands, and tailored our content to local customers. Our localization strategy combined with our vertical channel initiatives has helped us further build out our brand equity and generate meaningful growth. During the quarter, our localization sector revenue achieved 17% year-over-year growth. We also continued to deliver a wide range of information content in lifestyle related categories such as real estate, food and fashion during the period. In our real estate vertical, several events during the quarter demonstrated our monetization potential. We organized the 2019 National Campaign, Xin Young and brought together industry experts, real estate professionals and university student opinion leaders to discuss community development and facilitate creative competitions. This campaign attracted more than 2 million viewers on both our We-media accounts and other third-party media partner platforms. During the campaign, we listed over 1,000 real estate properties on our event page and signed contracts with over 200 advertisers. We also co-hosted the Golden Cicada Cannes International Creative Festival, the first ever festival for real estate creativity at a national level. We signed over 50 contracts with advertisers as a result. Once again, demonstrating the monetization potential of our lifestyle verticals. Our real estate vertical has a good track record of over 70% revenue CAGR in the past five years. We’re confident that we will maintain this blistering growth momentum throughout the course of this year. Our fashion vertical covers all of our user fashion needs and has become one of our largest and most comprehensive content category. Moreover, to capitalize our fashion vertical’s rising popularity, we’re exploring the implementation of innovative e-commerce monetization models. For example, we recently launched an e-commerce channel with influential pop-culture icons to jointly sell celebrity-endorsed fashion brands. We plan to simultaneously market and promote these fashion brands through both our icon channels and other third-party platforms in the coming quarter. For online reading sector, we continued to acquire more original IP content in order to reinforce our closed-loop IP ecosystem. Notably, we leverage our proprietary catalog of literature by licensing films and comics. We’re exceedingly pleased with Tadu’s performance to-date. I believe that it is on track to meet our previously-agreed-upon valuation adjustment mechanism. On the gaming front, we are progressing towards the launch of God Slayer [Foreign Language] a highly anticipated game produced by our subsidiary Miaoqiu. During the quarter, Miaoqiu secured partnership agreements with Steam and Nintendo Switch to sell and market God Slayer on both platforms. Currently, God Slayer is already listed on Steam and will be available for purchase subsequent to receive government approval. God Slayer has attracted widespread game recognition, receiving a score of 9.6 out of 10 in the Chinese gaming community TapTap. In fact, 330,000 registered users to TapTap have reserved the game, indicating the excitement and support of the title. Finally, I will share an update on Yidian. On July 23, we entered into a supplement agreement with the proposed buyers. The total purchase price would remain unchanged at US$448 million. We will now sell 34% of our equity stake instead of 32%. As a result, we’re still generating a significant return of nearly 6 times. Although, foreign exchange control and other uncertainty still exists in the market, we have signed this supplemental agreement to both hedge against such potential risks and better protect our company and shareholder interests as much as possible. Going forward, the proceeds that we’ll receive from the sale of Yidian will be allocated to our development of smart algorithms. Production of in-house IP content, expansion into lifestyle verticals and a cash injection will allow us to reward our supportive shareholders in the form of dividends. In summary, we remain committed to providing our users with authentic, professional and premium content. Our seamless integration of AI-powered recommendation engine with refined editorial curation, our rich library of original and proprietary content and our expanding growth initiative should help to increase our brand value, build our new media business and foster a healthier news community. Such value, in turn, will also bolster our relationships with advertisers and create win-win partnerships, ultimately resulting in long lasting value for our shareholders. With that, I will turn the call over to our CFO, Betty Ho for a financial update on the quarter.

Thank you, Shuang, and thank you all for joining our conference call today. iFeng’s total revenue in 2019 Q2 were RMB395.1 million, representing an increase of 8.6% from RMB363.9 million, caused by the consolidation of revenues of RMB49.2 million in the second quarter of 2019 from Tadu and the consolidated revenues of RMB84.6 million from Tianbo starting from April 1, 2019. The company’s net advertising revenues from traditional decreased by 28.5%, due to the macroeconomic uncertainties and increased competitions. Secondly, I will provide details on our revenue for the second quarter of 2019. Consolidated net advertising revenues for the second quarter of 2019 were RMB324.8 million, representing an increase of 2.3% in the same period last year. The increase was primarily attributable to the consolidation of advertising revenues from Tianbo. However, the company’s net advertising revenues from traditional business declined due to the above stated reason. Paid services revenues for the second quarter of 2019 increased by 51.1%. Revenues from paid content for the second quarter of 2019 increased by 126.7%, mainly due to the consolidation of Tadu. Revenues from games for the second quarter were RMB2.6 million, representing a decrease of 34.7%. Revenues from MVAS for the second quarter were RMB6.7 million, representing a decrease of 62%. Revenues from others for the second quarter of 2019 were RMB7 million, representing an increase of 513.4%, which was mainly caused by the increase in revenues from e-commerce and online real estate related services. Non-GAAP gross profit for the second quarter of 2019 was RMB212 million compared with RMB230.2 million in the same period last year. Non-GAAP gross margin for the second quarter was 53.7%, decreased from 63.3%. It was mainly due to a combined effect of decrease in gross margin of the company’s traditional advertising business and the margin contributions from Tianbo and Tadu. Non-GAAP content and operational costs, as a percentage of total revenue was, 39.1%, as compared to 29.8% in the same period last year. It was mainly due to the consolidation of content and operational costs of Tianbo and Tadu, and due to an increase in IP production costs. Revenue sharing fees as a percentage of total revenue was 3.5% as compared to 3.1% last year. Bandwidth costs as a percentage of revenue was same as last year at 3.8%. Non-GAAP operating expenses for the second quarter of 2019 were RMB286.8 million. Non-GAAP operating loss for the second quarter was RMB74.8 million. Non-GAAP operating margin for the second quarter was negative 18.9%. Net loss attributable to ifeng for the second quarter of 2019 was RMB70.1 million, as compared to net income of RMB49.2 million in the same period last year. Non-GAAP net loss attributable to ifeng for the second quarter of 2019 was RMB66.4 million. Non-GAAP net loss per diluted ADS for the second quarter was RMB0.91. In terms of balance sheet, as of June 30, 2019, the company’s cash and cash equivalents, term deposits, short term investment and restricted cash were RMB1.69 billion or approximately US$245.8 million, which included RMB251.6 million from Tianbo and RMB16.3 million from Tadu. Finally, I like to provide our business outlook for the third quarter of 2019. We are forecasting total revenues to be between RMB373.4 million and RMB393.4 million, representing an increase of 13.4% to 19.5% year-over-year. For net advertising revenues, we are forecasting between RMB312 million and RMB327 million, representing an increase of 10.9% to 16.2% year-over-year. For paid service revenues, we are forecasting between RMB61.4 million and RMB66.4 million, representing an increase of 28.3% to 38.7%. Half of 2019 has gone by. The macroeconomics is not getting any better. And the contents are being further regulated toward the next half of 2019. Thanks to our diversification strategy in Tadu and Tianbo, the strong growth in second quarter has driven to the increase of our total consolidated revenue to around 9%. We are confident that our total consolidated revenue will be increased by around 20% in full year of 2019. In terms of bottom line, we are aiming to breaking even in the next couple of years by implementing a very tight cost effective structure. This concludes the prepared portion of our call. We are now ready for questions. Operator, please go ahead.

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

Good morning, Shuang, Betty, and Liu Qing. Thank you for taking my question. In the prepared remarks, Betty reaffirmed that you are targeting at least 20% year-over-year revenue growth for this year. However, given your third quarter guidance, it only implies mid-teens revenue growth for third quarter. And how should we think about fourth quarter revenue growth to help you achieve the full year guidance? And I also want to ask more about your view on 2020. I understand that the visibility into next year is still limited. However, it would be great if you can share any thought on your revenue targeting next year. And my second question is also on margin. You are talking about breakeven in next couple of years. Do you have any more clear idea about when you are breakeven and turn back to profit? And my third question is on the use of proceeds from Yidian disposal. Can you update us on the time line of the dividend payment, dividend arrangement? And also, do you have any plan on share buyback given the current weak share price performance? Thank you, that’s all my three questions.

Thank you, Frank. I will take the first question and the second and third question will be answered by Shuang. For the full year of 2019, we are expecting a growth of around 20%, because that in general, our first quarter is generally the weakest quarter. And we are seeing the improvement starting from second quarter, third quarter and fourth quarter. And during the fourth quarter, we are expecting a strong growth because most of our IP will be happening during the fourth quarter. That’s why the fourth quarter will be a very strong quarter for the full year. And as a result, we are expecting a growth of around 20% during the full year because, of course, that’s being the – also being the same case for Tadu and Tianbo, because for traditional advertising business, fourth quarter generally is the strongest quarter. This is also the case for Tianbo. Yes, that’s why we are expecting a growth of around 20% for the full year of 2019.

Okay. Thanks. This is Shuang. Yes, this is Shuang. I will address your – the following three questions. Looking forward into 2020, I think despite the macro environment uncertainties and the current state of the industry. As a result of our endless efforts in improving our news apps, we are actually seeing steady improvement on our operating metrics and positive user feedback. We are confident, I think the trend will continue by leveraging the blistering growth trends via our consolidation of Tadu and online real estate. I think not only our user traffic will flourish, but also our revenue will continue to grow at around 20% year-over-year. So basically the trend will remain the same, at least 20% year-over-year overall revenue growth in the coming two to three years. And furthermore, as to the – your third question is about the breakeven point. We are reviewing our cost structure and making sure that our core business is going to be profitable, although, we may not be able to breakeven in a short run, but due to our increased investment in new business – in the short run due to our increasing investment in new business. But we are confident that we’ll be able to narrow our loss by next year significantly by implementing effective cost control initiatives and to eventually breakeven in next three years. As we refine our production process for premium content, improve the effectiveness of our advertisements and leverage the foundation we have laid to monetize vertical channels and develop new business initiatives, we’re confident that all revenue goals will exceed this year’s level over the next few years. Your third question is about dividends. Yes, I think as for the dividend, as for the use of proceeds, in our last call, we mentioned our plan to set aside 15% to 25% for potential special dividend payments. Roughly, 25% to 35% for investment in content and verticals to accelerate our organic growth and general working capital and 40% to 60% for strategic investments. However, due to the delayed closing of the deal, and in order to reward our shareholders for their continuous support and patience, now I want to announce that we are planning – we’re thinking about to raise the dividend payout ratio to between 25% to 50%. Of course, we’ll continue to consult with our Board and shareholders to see what is the exact payout ratio, so that we can balancing – we can make a balance between rewarding our supportive shareholders and continuing to make strategic investments. Furthermore, I will also – we will also consider a partial payment once we have secured the rest of the $15 million deposit. We’re very committed to sharing the return on investment with our investors and shareholders. In order to strike a balance, we’re also focused on finding the optimal way to utilize our capital to bolster operations. We’ll be sure to update investors, when we receive a further cash deposit of US$15 million upon approval by Phoenix TV. As to share buyback, we’re – because we’re still waiting for the pool of the shareholder for the Yidian deal, and also, right now, we have received a total US$20 million.

US$200 million.

US$200 million. So, it’s not a time to talk about it, but we want to keep the option open.

Thank you, Shuang and thank you, Betty. Very clear.

Thank you.

Thank you.

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

Good morning, management. Thanks for taking my question. My first question is regarding the sale of Yidian stake. To sign a supplemental agreement, end of July with another buyer and increase the number of shares being transferred to RMB212 million by the same price of US$448 million. So what is the thinking behind such a change? And my second question is a follow-up on dividend trends. So from the agreement it seems that you have already received some cash payment as of August of this year. So can you give us some color regarding the timing of the dividend plan in the future? Are you going to do it in the next few months or waiting until the deal is fully closed in 2020? Thank you.

Yes. Okay. Thank you, Binbin. This is Shuang. I think there are several reasons for the valuation adjustment. First, both party agreed to close the deal regardless of any dispute raised by any party, back to satisfaction of the closing conditions under the original share purchase agreement. Second, from a competitive point of view, the valuations of our comparable companies have been greatly adjusted in the recent period. We see a significant long run of the valuation of comparable companies. This trend has led to major revisions to the old valuation model in terms of previous valuations. Third, China tightened its foreign exchange controls during the China-U.S. trade war in order to proceed with the transaction. We made appropriate adjustment to the definitive agreement. But I want to emphasize, even under the new valuation, we will still receive a very handsome return of almost six times the original investment via a significant cash injection. So this is from investment point of view, basically, this is home-run. We are proud of this. As to the timing of the further payment, I want to say that after receiving the first tranche of $100 million last week, a buyer must pay the remaining US$50 million to us within two working days after receiving approval from the Phoenix TV shareholders meeting. And after we receive an additional deposit of the US$50 million, we will distribute US$200 million in shifts and update the register of shareholders. If the US$50 million deposit is not paid in due time, we’ll confiscate the total US$200 million previously received. So – and also to further reduce the risk of non-payment, we have signed a counter-party agreement. After we transfer US$200 million worth of shares, the voting rights will be shared by the buyer and us. And the buyer will act in concert with us until one of the following three conditions is fulfilled. First, the buyer pays the entirety of the remaining payments within three to six months after paying the first tranche. Second, within three months of the first tranche is paid, the buyer makes the payment of the US$200 million at a valuation of no less than US$1.4 million. And third, the buyer makes a deposit premium of US$30 million in addition to the US$50 million deposit. So therefore the addition of US$50 million on counter-party agreement will serve to significantly reduce the risk involved in the transaction. Yes, Binbin, did I answer your question?

Yes, you did. Thanks very much. Thank you.

Thank you. Thank you.

Your next question comes from the line of Chuck Li from First Shanghai Securities. Please ask your question.

Hi, management. This is Carmen on behalf of Chuck and thanks for taking my question. And could you share your strategy on the short form videos?

Okay. Hi, this is Shuang. Currently, I think the development of video content mostly center – user-generated content and professional video content. The UGC market is incredibly competitive and now where our strength lies additionally, we have to admit. However, stand being full from our expertise in news operation, professional video content remains – remain to be our focus. The development of high quality short form videos is a priority for us. The massive video content library of Phoenix TV covering news, history, celebrity interviews, culture shows and more is at the core of our video app. While the competition is mostly focused on entertainment and variety shows, our rich content library we have is our key differentiator in today’s highly homogenized market. We see a strong demand for this type of culturally rooted and highly differentiated content in our core user base, definitely more demand than what the market is currently capable of supplying. So this is why we planned to integrate Phoenix TV content with high quality documentaries and interview shows by creating new categories of video content such as hiking, reality shows. We will be able to provide innovative and differentiated premium content for China’s video market. As for right now, we are planning to have a separate team spearhead the implementation of those projects. This team will continuously improve our content management, product optimization, self control development and advertisements. We’ll also focus more on the further upgrade of our video app [indiscernible]. We planned to update everyone with more details in the coming quarters. Okay?

Okay. Thanks.

Thank you.

[Operator Instructions] There are no further questions at this time. I would like to hand the conference back to Ms. Qing Liu. Please continue.

Thank you, operator. We have come to the end of our Q&A session on 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 all.

Thank you, bye.

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