Earnings Call: Q3 2020

Nov 18, 2020

Earnings release

Ladies and gentlemen, thank you for standing by and welcome to the Phoenix New Media Third Quarter 2020 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. I must advise you that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Qing Liu. Thank you. Please go ahead. Thank you, operator. Welcome to Phoenix New Media's 3rd quarter 2020 earnings conference call. I'm joined here by our Chief Executive Officer, Mr. Shuang Liu and Chief Financial Officer, Mr. Edward Lu. On today's call, management will first provide a review of the quarterly results and then conduct a Q and A session. The Q3 2020 financial results and webcast of this conference call are available on our website at ir.taifeng.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. Although we faced a complex situation as a result of the COVID-nineteen pandemic and asset quality geopolitical tensions, we delivered revenues in line with our previous guidance in the Q3 of 2020, generating RMB303 1,000,000 in total revenue in the period. Furthermore, we remain steadfast in our commitment to providing a superior user experience, upgrading our products, maintaining our content leadership, augmenting our monetization capabilities and setting the stage for our return to growth. 1st, in regards to our flagship news app, iPhone, which continues to enhance its user experience and improve its content delivery efficiencies through the optimization of its core capabilities. During the quarter, for example, we raised the quality of viewing instances for our users, while also providing them with additional fresh short form content. Moreover, we were successful in introducing new public survey functions to the platform, which helped to amplify both user engagement and user interaction, especially within the content of major social events and hot topics. In addition to these key product upgrades, we also maintained our relentless efforts in fine tuning our content recommendation engine. By integrating our seasoned editorial knowledge into more areas of the content recommendation process, we were able to better focus on improvement of click through rates and user time spent on the platform during the period. As such, our user thickness improved substantially during the quarter with average time spent per user on platform increasing by 20% year over year and our user retention rate grows by 41% year over year. Meanwhile, our total number of newly added users also increased by 30% quarter over quarter as we continue to adopt a prudent approach in our user acquisition strategies and focus on leveraging those acquisition channels with quality ROI. Now turning to our content operations. In the Q3, we remain focused on strengthening our leadership in those content verticals that we believe have long term strategic values. In our financial vertical, for example, we further expanded our audience size by releasing such special hits as On the Cover, Omen, an in-depth video series featuring exclusive interviews with influential people, including Mr. Long Yong Chu, former Vice Minister of Foreign Trade and Economic Corporations and Ms. Maya Musk, celebrity model and mother of Elon Musk. In fact, on the cover was so well received by our users that it has recorded more than 60,000,000 total views on our old media portfolio during the quarter. To further establish our story in the food article, we organized the 2020 iPhone Food Festival in Shanghai, Hangzhou and Guangzhou during the period. In line with these efforts, we also introduced a number of quality restaurants into our Golden Wutong Restaurant Guide, Jin Wutong Tanting Shenzhen, which helped to better establish the guide as a go to source for premium dining choices. Since its initial launch, the iPhone Food Festival has gone beyond merely providing our users with food related content to penetrate in China's entire food industry, gaining traction with famous chefs, reputable restaurants and common KOLs in the food space. As a result of Yvan's widespread effect, it also continued to do well financially, once again demonstrating the monetization potential of our lifestyle verticals. Additionally, during the quarter, we remain committed to fueling the growth momentum of our fashion vertical, organizing several online ranking events for personal care and cosmetic products. The success of these ranking events was mostly driven by our significant brand influence, a large audience size. It was also due to our understanding of the new media landscape in China as we coordinated with 48 influencers in the cosmetic industries to organize effective promotional campaigns for the events. This combination of factors allow us to significantly expand the reach of our online ranking events, further showcasing the power of our brand authority and influence on our target audience as well as the fashion industry as a whole. Beyond our progress in expanding our vertical company leadership, we also made meaningful strides in the development of original IP programs. In the Q3, for example, our launch of the 4th season of Sheleo Western People, Sheleo, Shebei Hu, generated encouraging results with the first episode of the series immediately collected more than 100,000,000 total views to reach the top of trending lists for different social media platforms. Another successful show, Junping Pan, also continues to perform quite well in the period, enabling us to form strategic partnerships with both Jiangsu Satellite TV and Guizhou Satellite TV to broadcast the show. We believe that these type of deals are reputable and therefore demonstrate the significant monetization potential of our premium IP content going forward. On the innovation front, we maintain our focus on the cultivation of our existing initiatives, while also carefully analyzing a number of other potential business opportunities. In advertising, for example, we further accelerated the development of our ad platform, Feng Fei. As part of these efforts, we focused on upgrading those online traffic control and price building control functions capable of helping advertisers manage their acquisition costs with more positions. In addition, we also concentrated on enhancing Feng Fei's data management platform to augment its external traffic identification capabilities, advertisement distribution efficiencies and monetization performance. As a result of our efforts, the total number of mobile applications that Fangzhou has access to grew rapidly on a sequential basis in the quarter. In regards to our real estate vertical, the outbreak of COVID 19 has resulted in significant disruptions throughout China's real estate market in 2020, forcing developers to become increasingly aligned on both online house buildings and online housing transactions. To conduct their business. In the acquisition of the trend, we have partnered with real estate associations, government agencies and helped developers to launch live streaming sessions for property buildings. Beyond helping to facilitate property transactions more efficiently, this work also highlights our long term plans to provide the real estate market with a one stop real estate marketing solution. Looking ahead, as the epidemic continues to be gradually brought under control in China, we expect the integration of online and offline marketing channels to become the key for property developers to restore their business growth. In light of the slowing demand, we plan to continue leveraging both online and offline resources to further enhance our marketing solutions for the real estate vertical and thus better tailor these solutions to meet the needs of industry players in return. Now, please allow me to provide some additional color in regards to our key strategic focus for business development going forward. In terms of future investments, as we continue to evaluate potential investment opportunities, we'll also be sure to assess our existing capital structure and explore different ways of sharing the value we have created with our shareholders. For strategic investments, we will focus on forging partnerships with the top VC fund in several different verticals, which not only has the potential to generate lasting returns, but will also keep us up to date on the rapidly evolving market dynamics of new business factors. On organic growth front, we are maintaining our commitment to the continuous optimization of our product metrics with our flagship news app, iPhone, remaining at the core of our service offerings. Moreover, we'll actively explore new opportunities through continuous product innovation, while also experimenting with new monetization channels. As such, by focusing on these key strategic areas and executing as appropriate, we'll be able to capture market share at a larger scale and expand at a faster pace than previously possible, enabling us to capitalize on more worthwhile opportunities over the long run. In summary, in the Q3, we maintained our strategic focus on optimizing our flagship news app, expanding our content verticals and fueling the growth of our monetization capabilities. Looking ahead, we expect the new media industry to continue facing pressure throughout the remainder of the year as a result of the current macroeconomic and geopolitical uncertainties. Nevertheless, our deep technical expertise, premium news content and potent brand influence will enable us to remain at the forefront of China's new media industry, allowing us to capture those segments of the market with promising growth potential as the world rebounds from the COVID-nineteen pandemic. Yes, with this, I would like to pass to our CFO, Edward Lu. Thank you, Shuang. And thank you all for joining our conference call today. Our total revenue in the Q3 of 2020 were RMB303 RMB303 1,000,000 in line with our previous guidance range and representing a decrease of 10.9 percent from RMB339.9 million in the same period of last year. This decrease was primarily due to negative impact of the COVID-nineteen outbreak and heightened industry competition. I will now provide some additional color on our revenues during the Q3 of 2020. Net advertising revenues in the Q3 of 2020 were RMB281.3 million, representing a decrease of 10.2% from RMB313.1 million in the same period of last year. This decrease was primarily attributable to the previous stated reason. Paid services revenues in the Q3 of 2020 decreased by 19% to RMB21.7 million from RMB26.8 million in the same period of last year. Revenues from paid content in the Q3 of 2020 decreased by 34.3 percent to RMB8.9 million from RMB13.5 million in the same period of last year, which was mainly due to the tightening of news and regulations for digital reading in China and in line with the broader market conditions. Loss from operations in the Q3 of 2020 was RMB28.4 million compared to loss from operations of RMB60.2 million in the same period of last year. Operating margin in the Q3 of 2020 was negative 9.4 percent compared to negative 17.7% in the same period of last year. Non GAAP loss from operations in the Q3 of 2020 was RMB26.7 million compared to non GAAP loss from operations of RMB36.8 million in the same period of last year. Non GAAP operating margin in the Q3 of 2020 was negative 8.8 percent compared to negative 16.7% in the same period of last year. Net loss from continuing operations attributable to ifeng in the Q3 of 2020 was RMB0.9 million compared to net loss from continuing operations attributable to ifeng of RMB50.9 million in the same period of last year. Non GAAP net income from continuing operations attributable to ifeng in the Q3 of 2020 was RMB1.3 million compared to non GAAP net loss from continuing operations attributable to Ifeng of RMB47.5 million in the same period of last year. Moving on to our balance sheet as of September 30, 2020, the company's cash and cash equivalents, term deposits, short term investments and restricted cash were RMB2.37 billion or approximately US349.5 million dollars Finally, I'd like to provide our business outlook for the Q4 of 2020. We are forecasting total revenues to be between RMB332.4 million and RMB362.4 RMB362.4 million, representing a decrease of 17 percent to 9.5 percent year over year. For net advertising revenues, we are forecasting between RMB309.6 million and RMB334.6 million, representing a decrease of 14.7 percent to 7.9% year over year. For paid service revenues, we are forecasting between RMB22.8 million and RMB27.8 million, representing a decrease of 38.8 percent to 25.4 percent year over year. Looking ahead, we plan to continue focusing on our cost control measures, while also remaining prudent in our investments, selecting only those opportunities that are in accordance with our long term growth plans and able to leverage our ROI. While we do expect that the new media industry will continue to face challenges over the short term, we also believe that the industry's long term growth potential remains robust and that it also will continue to improve as China's economy gradually recovers. Moreover, we believe that our established brand influence, premium content offerings and cutting edge technology will continue to position us at the forefront of China's new media industry going forward, enabling us to restart our growth engines as the industry bounces back from the disruption caused by COVID-nineteen. This concludes the prepared portion of our call. We are now ready for questions. Operator, please go ahead. Thank you, Edward. Your first question comes from Binbin Ding from JPMorgan. Please ask your question. Good morning, management. Thanks for taking my question. My question is on the ad market. So can you give us an update on the advertising market trend in the second half? It seems your ad revenue decline widened in the Q3 and you still mentioned COVID-nineteen was still one of the major reasons. So can you elaborate on that? Also, can management talk about the trend by industries, which are the key categories you're seeing some recovery and which industries are still facing a lot of challenges? Thank you. Good morning, Binbin. This is Edward speaking. I will answer this question. Actually, in the Q3, our advertising business was impacted by the recurrence of the epidemic in certain areas of China, as well as the popularity of short form videos and live streaming e commerce, which continued to gain market share during the quarter. As you may know, our brand advertising and performance based advertising accounted for about 80% 20% of our total advertising revenues respectively. Actually in Q3, our brand advertising revenues increased on a sequential basis. This steady growth was mainly due to the gradual recovery of our offline promotional campaigns and the original IP programs. As more offline activities continue to take place in the remainder of 2020, we expect our brand advertising revenues to achieve double digit growth in the 4th quarter. However, on the other hand, our performance based advertising continued to face challenges during the Q3, mainly due to, I think, the following two factors. First, some of our clients were subject to stricter industry regulations and therefore, they had to adopt a more conservative ad placement strategy. And secondly, the overall supply of ad inventory in the market exceeded the market's demand, which made raising the eCPMs of performance based advertising more difficult. By sector, the top 5 industries covered by our advertising business are auto, e commerce, FMCG, financial services and the Internet services. Those industries which have traditionally accounted for a substantial portion of our advertising revenues, including auto and DAIGO, were mostly impacted in the first half of the year. However, as the pandemic gradually brought under control in the Q3, both industries have since recovered significantly. In regards to the auto market, the industry continued to show strong signs of recovery in the period. According to China Passenger Car Association, in September, retail sales of passenger cars increased by about 7.3% year over year. Wholesale sales of new energy passenger cars increased by more than 90% year over year. As such, we expect the auto sector to continue their recovery in the Q4. The online advertising industry has been under performing due to the worst of the epidemic in certain areas of China as well as this year's geopolitical issues. Short form video and the e commerce were the only sources of advertising growth in this quarter, while the rest of the industry underperformed. In recognition of the changing market dynamics, we have already established our presence in both the show from video and e commerce spaces. The majority of our original content is now produced in the show from video format and more than 80% of our brand advertising projects are now show from video projects, which we are able to monetize through a combination of content production and advertising sales. We are confident that despite facing today's complex and volatile advertising market, our competitive advantages will enable us to continue preparing the growth of our business lines going forward. Dimit, I hope I have answered your question. Yes, it does. Thank you very much, Edward. Thank you. Your next question comes from Carmen Zhang from First Shanghai Securities. Please ask your question. Hi, management. After you received the second charge of Aegis payment, how do you plan to use the additional cash on the company's balance sheet? Are you considering privatization of dividends? Hi, Carmen. This is Shuang. Let me answer your question. As of September 30, 2020, we had cash and the cash equivalents of US350 $1,000,000 We also maintained our cash strong cash flow during the pandemic. It was driven by our effective cost control measures as well as the excellent return that we have achieved in our Yidian investments. It showcased our strategic investment experience. As for our existing capital, we plan to use these resources in 3 key areas. First, we'll continue to optimize our product market metrics with our flagship news app, iPhone, remaining at the core of our service offerings. At the same time, we will also aim to develop more platform based products, which is capable of meeting the future needs of consumers. We'll also explore new business opportunities with both government and enterprise business partners. Secondly, we will actively explore more strategic investment opportunities by evaluating potential investments into those VC funds that are aligned with our business goals. In particular, we are focused on funds with extensive experience in TMT, entertainment, video, luxury consumer products and other vertical services. It will help to keep us up to great up to date on the very rapidly evolving market dynamics of new business sectors. And certainly, we remain committed to creating shareholder value and delivering returns to our shareholders in a variety of ways. Having said that, dividends are certainly one form of giving back to our shareholders that we will consider going forward. This year, we have observed the privatization of some U. S. Listed companies as well as registration system reforms in the domestic capital market. We will certainly evaluate our choices in due course with our continuing focus on ensuring shareholder rights and maximizing their interests. Right now, we'll also be sure to take over to take our own situation and market environment into account. In addition, we'll continue to work towards refining our core business and executing our new business initiatives. We're now taking active steps to expand our e commerce business by upgrading our e commerce products and building out our own supply chain to further improve the monetization capabilities of our e commerce business. We hope to share our business progress on this front with everyone as soon as next quarter. I hope this answers your question, Carmen. Thanks. Thank you. Your next question comes from Frank Chen from Macquarie. Please ask your question. Good morning, management. Thank you for taking my question. I have two questions. The first one is, I remember that you mentioned the company's average churn narrowed a lot in the 20 30. I think you did quite a good job year to date. And when do we expect to breakeven looking forward? And the second question is on the advertising, probably on the advertising price, unit price on brand ads. Can you update us how KPM looks like today compared to last quarter or a year ago? And what direction do you think KPM will go in the future and try to expand that? Thank you. Okay. Thanks. This is Shuang. I will answer the first part of the question. Maybe Edward can add a few more words on the advertising plan. Our operating loss for the 1st 9 months of 2020 was RMB73.8 million, which is much lower than our operating loss of RMB248 1,000,000 in the same period of last year. As such, we are now on track to achieve our operating target for the full year. However, due to the impact of the pandemic on our top line performance in 2020, we do not expect breakeven at operating level this year. As a public company, we fully understand the importance of profitability, and we're well aware that maintaining the healthy growth of our core business is the optimal path to long term profitability. With the continued optimization of our current strategy and vertical operations, we're confident that we can leverage our existing business strength to not only ensure the growth of our core business, but also develop additional growth drivers in such new era as new e commerce, product reviews and original IP programs. Over the long term, we believe that our effective corporate governance structure will enable us to strike a fine balance between growth and profitability. I think you still mentioned the advertising trend going forward next year, right? So maybe Edward can add a few more words on this. Hi, Frank. This is Edward speaking. Actually, as I have previously mentioned in Billings' question, looking forward, the advertising industry is still full of challenges. I think like it's first, it depends on the development of the academic worldwide, especially in China. We think next year it's getting better, but it's still a question, right? And so in this kind of macroeconomic environment, we think the online advertising industry are still facing challenges maybe in especially in the first half of twenty twenty. And also this online advertising industry is evolving and users spend more and more time on platforms like Douyin and Kuaishou, this kind of short form video platforms. So our advertising incomes are still facing pressures, especially for the how to make our advertising more cost effective is a big challenge for us. But we as I also mentioned before, actually we have recognized this kind of changing in market dynamic. We already put a lot of effort in like the short form video and e commerce spaces. So next year, there will be challenges, but we also feel very excited and confident. We think we can handle these challenges and make some progress in advertising business. Thank you, Frank. Thank you, John. Thank you, Frank. There are no further questions at this time. I would now like to hand the conference back to the management. Please continue. Thank you, operator. We have come to the end of our Q and 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 all. Thank you. Ladies and gentlemen, thank you for participating. You may all disconnect.