Phoenix New Media Limited (FENG) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Phoenix New Media 2019 Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions] I must advise you that today’s conference is being recorded. 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 Third 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 first provide a review of the quarterly results and then conduct a Q&A session. The third quarter 2019 financial results 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 website in a few hours. Before we continue, I would like to 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. Despite macroeconomic uncertainties, we have upheld our core values of professional journalism in the digital era. Our mission is to leverage our distinctive combination of editorial expertise on AI algorithm to create a warm, fulfilling and empowering experience for our users. Our commitment to these bedrock values contributed to our solid financial performance, as total revenue in the third quarter increased by 15.4% year-over-year to RMB380.2 million. This growth rate was in line with our previous guidance and reflected our operational strength in 3 areas: product enhancements, to increase user stickiness; content exclusivity, with in-house IP to augment competitive differentiation; and vertical channel advancement, to enhance our brand interest. First and foremost, the operating metrics of our flagship news app, ifeng, continue to flourish leveraging our smart push algorithm we developed in-depth behavioral analytics to uncover our users' potential preference, improve our users -- providing accuracy and increase our user-targeting position. As a result; while we greatly reduce the number of topics pushed to users because those topics were tailored to each user's individual interest, our user engagement actually increased by 4% and retention rate increased by 12. 5% sequentially, during the third quarter of 2019. In addition to product enhancement in ifeng, we also augmented our exclusivity in delivering breaking news and current affairs, thus, enhancing our competitive differentiation. For example, in October 2019, we produced a substantial amount of exclusive coverage of China's 70th anniversary celebration through our Access to Mr. Liu Changle, CEO and Founder of Phoenix TV, our parent company. Ms. Liu was the only CEO of a major satellite TV network invited to watch the military parade, a top tier -- rostrum. As a media veteran, Mr. Liu's presence at the country's epic channel during its most important event of the decade, granted him a unique opportunity to speak with a number of public luminaries, thus gaining us exclusive news insights, through live interviews and commentary. In total, we recorded over 20 million views during the event, illustrating the substantial demand from viewers for this type of exclusive coverage. Besides coverage exclusivity, we also grew our proprietary IP content library, which holds significant growth potential. A prime example is the Alliance of Heroes [ph], a talk show we produced in-house to showcase some of China's most decorated Olympic gold medalists through a series of long-form interviews. The release of its first season on September 26 became an instant success, garnering approximately 8.3 million views on our platform, and 20 million views across the Internet. The success of this program continues to bolster our presence in the sport category. It also provides us with a rare portfolio of content expertise, talent networks and a growing fan base to be leveraged in our coverage of the upcoming 2020 Olympic Games. A further example of our proprietary content production capability is Hua Talk Show [ph], [Foreign Language], an investigative reporting series we produced to expose those that are industry secrets that have significant societal impact. Its initial episode titled Secrets Behind Hidden Cameras [ph] was a smash hit, recording 27.5 million views online and registering approximately 400 million related topics on social media. Leveraging a team of investigative journalists' laser-sharp focus and acquisitive mind, the show exposed the behind-the-scene insights that resonate with the public desire for secretive tools and unmasked relevance. It helped us to further solidify our reputation in the field of investigative journalism, and hope our competitive differentiation in content offering. Besides content exclusivity with IP extension, we also advanced our vertical channel development. As the current macroeconomic uncertainty heightened users' attention to financial markets, we have intensified our operating focus on the finance vertical channel. During the third quarter, we optimized our content management systems by realigning our production team personnel. As a result, we shorted our coverage response time for picking news in finance, heightened our capacity to produce in fast content on hot finance topics and accentuated our brand presence in a genre that is highly sought after by both our high-end users and advertisers. For example, our exclusive interview with Mr. Liang Chun Yi [ph], former Chief Executive of Hong Kong, successfully captivated our audience attention drawing approximately 35 million views to our platform. However, our coverage of the World Economic Forum in July resulted in a series of exclusive video interviews with industry-leading experts attracting 16 million views in total. In addition to vertical channel development, we also continued to explore innovative methods of bolstering our brand influence and advertising capabilities. In July, for example, we established a partnership with iSpace, the first private Chinese-based launch company to successfully achieve orbit. Through this partnership, we pioneered a series of creative marketing campaigns for our advertisers by securing payload space for their products on board, Hyperbola-1, the first commercial rocket in China to achieve orbit. As the Hyperbola-1 broke free of the sun's gravitational pull and began to circumnavigate the earth, our clients' products was encapsulated in the spectacle of a truly unique social moment. The success of our partnership is iSpace further illustrates our ability to develop effective marketing solutions and create exclusive once-in-a-lifeline advertising opportunities for our clients. Lastly, let me share with you an update of our Yidian transaction. As previously stated, we entered into a supplemental agreement with the proposed buyer of Yidian on July 23rd, 2019. As of October 24, 2019, we had already received a cumulative payment of $250 million after transaction was duly passed by PTV's EGM. Consequently, we have transferred $200 million worth of shares to the buyers. Meanwhile, they will share the voting rights and act in concert with us until they pay the full balance. Currently, our Board is considering the allocation of around $100 million to a special dividend payment to reward our shareholders for their support to the company by the end of the year. We'll be sure to update investors upon our Board's approval. The majority of the remaining proceeds from the transaction will be allocated to our development of smart algorithm, production of in-house IP content and expansion into lifestyle verticals to fuel our organic growth engine. In summary, during the third quarter, we increased our user stickiness through product enhancement, augmented our competitive differentiation through exclusive content with in-house IP and positioned ourselves well for monetization through vertical channel investments. Despite the current macroeconomic headwinds, we have stayed ahead of the curve by aligning our business with shifting industry dynamics, refining our product for the mobile era, and managing our cost structure prudently. We are confident that the combination of our abundant working capital, professional journalism expertise, exclusive information access, proprietary content producing, and the strategic investments know-how have formed as launch pads to propel us into a renewed growth level. With that, I'll turn the call to Betty Ho, our CFO, to go through the financial details.

Thank you, Shuang. And thank you all for joining our conference call today. Our total revenues in the third quarter of 2019 were RMB380.2 million, representing an increase of 15.4% from RMB329.3 million in the same period last year. Our total revenue this quarter included both RMB40.3 million of consolidated revenues from Tadu and RMB80.1 million of consolidated revenues from Tianbo. I will now provide details on our revenues for the third quarter of 2019. Consolidated net advertising revenues for the third quarter of 2019 were RMB327.6 million, representing an increase of 16.4% from RMB281.5 million in the same period last year. The increase was primarily attributable to the consolidation of advertising revenues from Tianbo and Tadu. Net advertising revenues from our traditional business decreased by 16.2%, due to macroeconomic uncertainties and intensified industry competition. Pay services revenues for the third quarter of 2019 increased by 10% to RMB52.6 million from RMB47.8 million in the same period last year. Revenues from paid content for the third quarter of 2019 increased by 39.5%. It was mainly due to the consolidation of Tadu, which was partially offset by a decrease in the company's traditional digital rating business, due to the regulatory tightening on digital reading sector in China. Loss from operations for the third quarter of 2019 was RMB10.8 million as compared to RMB50.6 million in the third quarter of 2018. It was mainly due to a gain of RMB62.1 million arising from the changes in fair value of financial assets contingency. Returnable considerations for the third quarter of 2019, which represented the changes in fair value of the company's right to receive the contingent returnable considerations, in relation to the acquisition of Tadu, subject to certain price adjustment mechanisms based on Tadu's operating and financial performance in 2019 and 2020. Operating margin for the third quarter was negative 2.8% as compared to a negative 17.2% in the third quarter last year. Non-GAAP loss from operations for the third quarter of 2019, which excluded share-based compensation and changes in fair value of financial assets contingent returnable consideration was RMB67.6 million as compared to RMB54 million in the third quarter of 2018. Non-GAAP operating margin for the third quarter of 2019. which exclude share-based compensation and changes in fair value of financial assets contingent returnable consideration was negative 17.8% as compared to negative 16.4% in the third quarter of last year. High effective tax rate in the third quarter of 2019 is mainly attributable to larger taxable profits for the company's subsidiaries as compared to the third quarter of last year after considering the valuation allowance of deferred tax assets. Net income attributable to ifeng for the third quarter of 2019 was RMB5.9 million as compared to net loss attributable to ifeng of RMB16.6 million in the same period last year. Non-GAAP net loss attributable to Phoenix New Media for the third quarter, which excluded share-based compensation, income or loss from equity method investment, net of impairments and changes in fair value of financial assets contingent returnable consideration, was RMB50.8 million as compared to RMB18.3 million in the third quarter of 2018. Moving to our balance sheet, as of September 30, 2019, the company's cash and cash equivalents, term deposits, short-term investments and restricted cash were RMB2.06 billion, or approximately US$288.9 million, which excluded RMB18.4 million from Tadu and RMB131.3 million from Tianbo. Finally, I'd like to provide our business outlook for the fourth quarter of 2019. We are forecasting total revenues to be between RMB431.2 million and RMB451.2 million, representing an increase of 8% to 13% year-over-year. For net advertising revenue, we are forecasting between RMB370.9 million and RMB385.9 million, representing an increase of 4.2% to 8.4% year-over-year. For paid services, we are forecasting between RMB60.3 million and RMB65.3 million, representing an increase of 39.4% to 51%. Despite the backdrop of intensifying competition in the advertising industry as well as the current macroeconomic slowdown, we are confident about our future growth prospects as we continue to leverage our superior content leadership, by providing most relevant information to our users through the precise combination of editorial suggestion and AI algorithm. Meanwhile, we are actively optimizing our cost and expense structures to maximize our eye for our shareholders. We have already reduced over 20% of our organic G&A costs, aiming to reduce our next year's operating loss by half. Ultimately, we are hoping to turn profitable within the next few years despite the persistence of challenging market conditions. Before we start Q& A section, I would like to thank Shuang, the CEO of FENG, for giving me the opportunity to work for FENG for the last 6 years. I tendered my resignation as the CFO of Phoenix New Media for personal reasons, which becomes effective on November 14, 2019. It has been a great honor to work with a brand as iconic as FENG. It is with a heavy heart that I leave such a dynamic and collaborative workplace. Going forward, I'm fully confident that the company is well positioned for success in the coming years. With that, I'm turning the call back to our CEO, Shuang Liu, for few additional works.

Thank you, Betty. We are extremely grateful for your past contributions and dedication to the company. In particular, your outstanding leadership has proven highly valuable to the company. We believe that the finance and accounting structure you have implemented will continue to serve us well going forward. On behalf of everyone at Phoenix, I wish you all the best in your future endeavors. Meanwhile, I'm pleased to introduce our Edward Lu -- Lu as our new CFO, with experience in various managerial positions at our company since 2009, Edward has a comprehensive understanding of both our company and the broader media industry. His expertise give us all of us confidence that an executive transition process will be very smooth. With Edward at the finance helm and the supportive team around him, we'll be able to adapt to changing market conditions well and position ourselves for renewed growth segment. Now operator, we are ready to open up the call for questions.

Thank you Shuang [Operator Instructions] Your first question comes from Binbin Ding from JPMorgan. Please ask the question.

Good morning management. Thanks for taking my question. First, I would like to thank Betty for his help during the few past years and I wish her all the best on the new journey and also congrats to Edward on the new role. I have 2 quick questions. First is, the use of cash from the sale of Yidian investment? And second is, when do you expect that the buyer will pay the remaining part of the acquisition fees? Thank you.

Binbin, this is Shuang, thank you for your question. For now, we are still evaluating the use of proceeds from the sale of Yidian. I think we have to be very cautious of both the industry challenges and investment opportunities ahead of us. The Chinese media industry is evolving very rapidly, so we need to evolve with it. First, we think we'll continue to invest in product innovation to capture growth opportunities. At the same time, to mitigate the inherent challenges of expanding our business, improving our cash flows and sustaining organic growth. We will also continue investing in the improvement of our AI algorithm and propriety content production capabilities. Overall, we plan to achieve a balance between capitalizing our growth opportunities through strategic investments and sustaining organic growth by refining our core competitive advantage. So with this in mind, we'll use the proceeds to secure both our future growth prospects and long-term shareholder value. But, of course, we'll continue to update the market regarding our plans. As to the remaining balance, especially the risk associated with the remaining payments, we have established -- we have signed a concert party agreement and received a US$50 million deposit from the buyer to ensure that certain risks are mitigated. To elaborate, under the concert party agreement, the voting rights will be shared between us and the buyer after we transfer the US$200 million worth of shares to the buyer. And the buyer will act in concert with us until one of the following three conditions is fulfilled. Number one, the buyer pays the entirety of the remaining payment within three to six months after paying the first tranche. Number two, the buyer makes a payment of $200 million or the valuation of no less than 1.1 million – US$1.1 billion, within three months of the first tranche is paid. And the third, the buyer makes a deposit payment of US$13 million in addition to the original US$50 million deposits. So its worth to note that Yidian is currently remains on track to achieve its strategic goals. So in the worst-case scenario, if the buyer walks away from the transaction, we are still very confident in our capability to consolidate and operate Yidian efficiently. Thank you, Binbin.

Your next question comes from the line of Frank Chen from Macquarie. Please ask the question.

Good morning, Shuang, Betty, and Edward on noting. I have only one quick question on the margin outlook. I think you did very good job in terms of cost control this quarter. And you did mention that you are going to half your operating loss in 2020. Can management share us the detailed plan on achieving that? Thank you.

Hi, Frank. This is Betty. Thanks for your question. While, actually, in this quarter, you have noticed that our total traditional ad revenue, even though have decreased by 16%, but our mobile ad revenue was increased by 5%, which is very good as compared to the market. But our PC ad revenue has been continuing to decline due to the market situation. And from another perspective, let's take a look at our brand advertising and SME's clients. For our traditional brand advertising revenue, it has increased sequentially this quarter and is expected to be better this next quarter due to seasonality. However, our promgamtic buying advertising income, mostly our SMEs, have decreased significantly year-over-year due to intensified competition while our brand advertising decreased slower than the market due to our strong brand recognition in the market. Meanwhile, we also plan to optimize our combination of advertising and native marketing. This will be achieved by integrating our hot topic coverage with cross-platform marketing solutions for both online and offline events. We are also proactively exploring other potential innovations while planning for significant societal events in the coming years. Both of which we believe will help to boost our ad monetization in 2020. However, as for the macroeconomic we remain cautiously optimistic in 2020. If the uncertainties persist, we expect that our advertisers' budget will be further reduced. This is on the topline. In the bottom-line, in my script, I have mentioned that we have been initiated a lot of cost restructuring measurements including cost savings on project costs, which Shuang mentioned earlier. And also including on very straight regulations on our marketing expenses. So, out of all these initiatives, we have already reduced our G&A costs by 20%. So, we are going to further look into a cost restructuring initiatives. By doing so, we are hoping that our loss will be further reduced as compared with this year. And as we mentioned, we are looking forward to be profitable in the next few years.

Right. Maybe I can add a few more words on cost restructuring initiatives. Basically, it lies in three areas. For user acquisition, we will start limiting our investments in areas with less efficient traffic acquisition. By prioritizing projects and channels with higher ROIs, we will reduce our user acquisition costs and improve the quality of our user base expansion. For the production of our proprietary content, for example, our IP projects will also carefully analyze the ROI of each project and adopted a stricter itemized review process for IP projects that produce lower margins. As part of the boarder strategy shift to focus on improvement in profitability over revenue growth, we'll choose now to invest project on the lower end of the margin spectrum when appropriate. Finally, we have implemented a rigorous review process for our pilot products. Pilot products that underperformed and lack a strong potential for driving user base expansion and the revenue growth will be abundant. So by doing this, we are confident that these efforts will significantly reduce our COGS in the coming years, as we are aiming to return to profitability in the coming two to three years. Thank you, Frank.

Thank you, Shuang and Betty. And Betty, wish you all the best in your next journey. Thank you.

Thank you, Frank.

Your next question comes from the line of Carmen Zhang from First Shanghai. Please ask your question.

Hi, guys. Thanks for taking my questions and I have two questions. One is why you changed the Media ad operating metric. And the second one is, can you share something about the brand advertising. Can you think it can continue its growth trend in 2020?

Yes. Thank you, Carmen. Let me take your first questions. I think the improvement of our app's operating metrics is primarily a result of a more effective content management process and technological advancements. First, we enhanced our capabilities in covering hot topics and at a more precise way, by strengthening the internal reviewing process. Our editorial team is now meeting on a daily basis to choose the latest trending issues and producing related content. Secondly, we continue to leverage our AI technology to enhance our algorithm to improve accuracy and relevancy. During the quarter, we also rolled out updates -- upgrades to our ifeng news app our push notification features, which improved our effectiveness in the recommendation of content to new users. So as a result of it, we are now increasingly able to attract user attention with fewer push notifications. During the third quarter, this improvement translated to a 4% increase in user engagement level and a 12. 5% increase in user intention rate, as I mentioned in my opening remarks. Finally, we remain committed to striking a balance between keeping our user informed and entertained. Through our unwavering commitment to providing users with valuable, informative and thought-provoking content, we have a slate a solid foundation for our core media business. As we continue to upload these values going forward, we are confident that our operating metrics will maintain their healthy growth trajectory in 2020. So maybe Betty can further elaborate on the brand advertising and their trends.

Hi, Carmen. As for our brand advertising for this quarter, our brand -- our traditional brand advertising revenues have increased sequentially this quarter and is expected to do better next quarter. But overall, our brand advertising actually decreased slower than the market due to our strong brand recognition. We have put a lot of initiatives to boost our ad advertising revenue. One major action is to integrate our hot topic coverage with cross-platform marketing solutions for both online and offline events. As we are doing a lot of events in the future, and we should expect that our costs will be increased as well. But by doing these initiatives, we believe that both of our -- no matter our brand advertising or SMEs clients will be increased in 2020. However, as I mentioned earlier, because of the macroeconomic uncertainties in 2020, so we are uncertain if the market is continuing to get worse. If this is the case, we expect that our advertisers' budget will be further reduced.

Okay. Thanks.

[Operator Instructions] There are no further questions. At this time, I would like to hand the conference back to Qing. 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.

Thank you, all.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.