Earnings Call: Q2 2020

Aug 18, 2020

Earnings release

Ladies and gentlemen, thank you for standing by, and welcome to the Phoenix New Media Second 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 turn the conference over to your first speaker today, Qing Liu. Thank you. Please go ahead. Thank you, Sun. Welcome to Phoenix New Media's Q2 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 Q2 2020 financial results and webcast of this conference call are available on our website atir.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 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. During the Q2 of 2020, the COVID-nineteen pandemic continued to cause significant macroeconomic uncertainties as well as substantial headwinds to the entire advertising industry. Undeterred by these challenges, we upheld our commitment to producing premium new content and focus our resources to create long term growth and sustainable competitive advantages. Comfortably, we concluded the Q2 of 2020 with encouraging financial results. Our total revenue were within our previous guidance range. In addition, we delivered a positive quarterly operating income of RMB25.6 million. Our solid financial performance demonstrates that our prudent cost control measures have been effectively in combating the widespread market challenges. It also validates our corporate development strategies as we further upgraded our flagship news app, bolstered our brand influence and executed new initiatives with favorable monetization potential in the Q2. On our flagship news app front, we continue to improve the platform capabilities by upgrading its technology, fortifying its content operations and enhancing its content offerings. As a result, we increased the thickness of our news app. Our platform's user retention rate grew by 39 percent year over year and every time spent by user on the platform increased by 21% year over year. Building upon our experiences in content operations and expertise in AI algorithm, we have constructed a premium content library to cater to the needs of our users. This good confidence resides in our simplest integration of content and algorithm. By combining our editors' professional judgment with our software automation capabilities, we have put in place a set of rigorous standard operating procedures to ensure both targeted and efficiencies of our content distribution system. Our process starts with our editors as they leverage their valuable expertise and authorities, recommend hot topics in their respective fields and evaluate the content quality, trial and social values. Then, our AI algorithm blends editorial recommendations with content categorizations, labels and user characteristics, utilize enhanced content body and other advanced techniques and deliver a large content to our users that matches their individual requirements precisely. Consequently, we are able to satisfy a variety of users' demand, ranging from acquiring information to fulfilling personal interests and indulging in entertainment. We have also successfully resolved the cold start problem as deformation from KONST. Above all, by integrating content with technologies, we recommend content carefully curated by our users in an innovative and painting manner to elevate breaking news events, our seasoned editorial team refined our news monitoring process continuously. Moreover, to better satisfy users' entertainment demands and active attention. We optimized ifeng's user interface, introduced fresh new format of content, such as portrait mode videos and editor's peak views. As a result, our platform's driving stream of innovative, informative and engaging content further expanded, and our value proposition for iPhone users compound it accordingly. As a percentage front, we also continue to organize online events during the quarter to enhance our brand image, improve our advertiser value proposition, generate additional stream of income. For example, in May, we organized the iPhone Finance Visual Service, which was a third market share finance event to be held in the 3rd class field final event to be held in China since the outbreak of COVID-nineteen. Users throughout the country were highly appreciative of the deep financial and economic insights still during this event. Latest event coverage generated 22,900,000 views on our i4 pack. Event's trending topics reported around 170,000,000 views on social media at the same time. In June, we organized the dialogue with the World Online Forum in partnership with the National Academy of Development and Strategy of Renmin University of China. This online forum brought together 32 distinguished guests paying from all commerce of the globe, 2 corners of the globe. In the context of the global pandemic, our ability to host such high profile events has proven to be quite effective, enabling us to further augment our brand equity despite our physical constraints and related safety concerns. In line with these online events, we also continue to expand our library of original IP to ensure that our catalog of content offerings remains highly attractive and of superior quality. During the quarter, for example, we continued to produce Junping Pan. The 2,400 UK show has already delivered outstanding results as certain episodes of Junping Time recorded over 18,500,000 views on our platform. Besides the success of Junping Time, we also continue to produce a line of heroes. Initially released in September 2019, the show offers in-depth exploration of the Olympics journeys and captivated audiences across the country. As a result of the show's wedding popularity, Alliance of Heroes was aired by Beijing Satellite TV, one of the most influential satellite TV channels in China. Furthermore, we have already secured a sponsorship deal for the 2nd season of Alliance of Heroes, with the best launch in August. The warm reception and commercial success of our highly quality original content once again illustrated the premium nature of our brand. Such influence has enabled our brand advertisers advertising business to achieve sustainable growth despite the challenging market conditions. We would also like to note that the challenging micro environment significantly impacted our online real estate vertical in the quarter, making it especially hard for our real estate vertical to achieve its revenue growth targets for this year. In light of these developments, we will remain focused on streamlining this segment's operations, executing new product innovations and implementing additional cost control matters going forward to safeguard our cash flow and profit growth. Now, turning to our new business initiatives. During the quarter, we carefully analyzed a number of business opportunities and boldly stepped up to launch several new promising initiatives in the fields of advertising, media content and e commerce. As for our advertising business, we have built several platforms such as fengyou and fengyou to both fulfill the diverse needs of advertisers as well as provide customized advertisement solutions to our clients. Following the success of these two platforms, we decided to develop from to access more than 60,000,000 daily active users, Fengvei is able to help our advertising clients significantly improve their advertising reach. On the developer side, Fengfei's ability to help ABB developers convert and monetize the user traffic has helped to set the platform apart from its competition. Going forward, we plan to produce performance based advertising solutions on FinFay while also enabling platform to interface with other media DSP platforms. As we continue to cultivate Fengfei, we believe that it will also become a new growth driver with the potential to generate a handsome return. In order to meet the demands of China's rising middle class for practical and unbiased purchase advice, we also upgraded the Phoenix Lab on the video series for product reviews this year. By the end of the quarter, the Phoenix Lab video series has already attracted 1,400,000 users and generated a total of 43,000,000 views, as Phoenix Lab currently specializes in consumer electronics reviews, we're now mainly focused on establishing brand partnerships in this industry. Nevertheless, as the shows, user recognition and advertisers endorsements continue to grow, we aim to replicate this innovative success formula in other industry verticals going forward. Recognizing the quality and size of our user base, we have also ramped up the development of our e commerce marketplace, Ifeng Wu Tong Hui. Since its launch, Wu Tong Hui has been made available to users throughout ifeng.com as well as our WeChat official accounts and attracted around 90,000 followers in total on WeChat. Additionally, during the 6 18 shopping festival, we developed a membership system to better facilitate user purchase and boost user experience. As a result, Wutong Hui facilitated a record GMV of RMB3.3 million in June. Although Chunghui is still at the relatively tight early stage of speed platform development, we believe that it has already demonstrated a substantial potential for monetization, and we are optimistic about its future growth prospects. Now, let me share an update on the Yidian transaction. As we have announced previously, the current macroeconomic uncertainties have led to some pressure on the buyers' funding resources. However, if the transaction were to be terminated, then we would face serious immediate challenges, such financing additional investment in Yidian and managing the platform without distracting us from our long term strategic focus. As a result, we believe that the current total consideration of Yidian at USD350 1,000,000 is within a reasonable range. In addition, after capital consideration and analysis, we are certain that the recent valuation adjustments are in the best interest of all parties when we serve to maximize our shareholder value in the long term. In summary, during the Q2, we continued to accelerate our growth momentum by upgrading our flagship news app, both buying our brand equity and executing new business development initiatives on multiple fronts. While the current macroeconomic uncertainty and industry headwinds make forecast difficult, we believe that our progress to date has helped set the stage for sustainable growth in the future. Moreover, as we continue to advance throughout the rest of the year and beyond, we plan to remain prudent in our investments and channel our resources only to those initiatives with attractive potential ROI. Looking ahead, we aim to leverage our competitive advantages in professional journalism, blended working capital and sufficient distribution network to bolster our new media leadership in China, delivering sustainable growth and generate increasing shareholder value in the long run. Yes, with that, I'd like to pass to our CFO, Edward Riek. Thank you, Sean, 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 disposal of our equity interest in Tadu. On May 18, 2020, Ifeng sold all of its investments in Yipian Xindong, which owns and operates the Tadu apps that provide digital reading services. The disposal of Tadu represents our strategic shift in operation of online literature business that had a major effect on our operations and financial Therefore, the disposal of Tadu was qualified for reporting as discontinued operations in our financial statements. Accordingly, Tadu's results of operations have been excluded from continuing operations in the condensed consolidated statements of comprehensive income loss and are presented in separate items as discontinued operations for the Q2 of 2020 and the prior period. Additionally, the related assets and liabilities associated with the discontinued operations in the prior year consolidated balance sheet or classified as asset liabilities held for sale to provide the comparable financial information. The financial information and the non GAAP financial information information disclosed in this press release is presented on a continuing operations basis, unless otherwise specifically stated. For the details, please refer to our earnings release. Let me take you through our financial highlights for the Q2 of 2020. Our total revenues in the Q2 of 2020 were RMB312.3 million, which were in line with our previously guidance range and represented a decrease of 9.7% from RMB345.9 million in the same period of last year. The decrease was primarily due to the negative impact of COVID-nineteen outbreak and the intensified industry competitions. I will provide some additional color on our revenues in the Q2 of 2020. Net advertising revenues in the Q2 of 2020 were RMB286.3 million, representing a decrease of 0.5% from RMB309.5 million in the same period of last year. This decrease was primarily attributable to the previously stated reason. Paid services revenues in the Q2 of 2020 decreased by 28.9 percent, RMB26 1,000,000 from RMB36.4 million in the same period of last year. Revenues from paid content in the Q2 of 2020 decreased by 29% to RMB14.2 million from RMB20 1,000,000 in the same period of last year, mainly due to the market condition as well as the tightening of rules and regulations on digital reading. Income from operations in the Q2 of 2020 was RMB25.6 million compared to loss from operations of RMB75.5 million in the same period of last year. Operating margin in the Q2 of 2020 was positive 8.2% compared to negative 21.8 percent in the same period of last year. Non GAAP income from operations in the Q2 of 2020 was RMB27.8 million compared to non GAAP loss from operations of RMB73.1 million in the same period of last year. Non GAAP operating margin in the Q2 of 2020 was positive 8.9 percent compared to negative 21.1 percent in the same period of last year. Net income from continuing operations attributable to ifeng in the Q2 of 2020 was RMB2.8 million compared to net loss from continuing operations attributable to ifeng of RMB69.8 million in the same period of last year. Non GAAP net income from continuing operations attributable to ifeng in the Q2 of 2020 was RMB23.7 million compared to non GAAP net loss from continuing operations to Ifeng of RMB67.9 million in the same period of last year. Moving on to our balance sheet. As of June 30, 2020, the company's cash and cash equivalents, term deposits, short term investments and restricted cash were RMB1.72 billion or approximately US243.9 million dollars Finally, I'd like to provide our business outlook for the Q2 of 2020. We are forecasting total revenues to be between RMB295.4 million and RMB315.4 million, representing a decrease of 13.1% to 7.2% year over year. For net advertising revenues, we are forecasting between RMB275 1,000,000 and RMB290 1,000,000, representing a decrease of 12.2 percent to 7.4 percent year over year. For paid service revenues, we are forecasting between RMB20.4 million and RMB25.4 million, representing a decrease of 23.7 percent to 5% year over year. To conclude, our decision to take the long term view and prioritize these investments capable of delivering quality ROI started to show positive results in the quarter. That progress was not only illustrated by our profitability expansion, but more importantly, also by our successful implementation of effective cost control measures, which have helped to make us leaner and place us in a stronger position to achieve our future financial targets. Going forward, to sustain our growth momentum, we will invest in those areas that will improve our product offerings, accelerate the development of our new business initiatives and refine our operating efficiency. Despite the challenges caused by the outbreak of COVID-nineteen and the resulting macroeconomic uncertainty, we believe that our competitive brand advantage and effective cost control measures will enable us to weather the current environment and emerge from the crisis stronger than ever atop a foundation built to support our enduring growth. This concludes the prepared portion of our call. We are now ready for questions. Operator, please go ahead. Thank you. Your first question comes from Xiaobin Zhang from First Shanghai Securities. Please ask your question. Hi, management. Thanks for taking my question. Could you share some updates on the advertising success in the second quarter, such as the recovery factors for the brand and performance base at the advertiser budget and spending in different verticals and how do you think about the advertising industry in the second half of this year? Hi, Xiaobin. Thank you for the question. Although the overall advertising market continued to be affected by the epidemic in the second quarter, We still managed to grow our advertising revenue by 37% on a sequential basis. Apart from seasonality and the holiday effects, our sequential growth was driven by our long established brand influence as well as our ability to quickly adjust our advertising business development strategy to the new environment. For our brand advertising and performance based advertising accounted for 79% 21% of our quarterly advertising revenue, respectively. Our strategy to focus on premium content production and technology advancements enabled our organic brand advertising segment to maintain its upward trajectory despite the impact of the epidemic. Actually, during the quarter, for example, we continue to optimize our AI algorithms to meet the diverse needs of our brand advertising clients. We also improved the accuracy of our targeted advertising services and developed new ad products by incorporating new media formats, such as live streaming. These efforts enabled us to further enhance the conversion rate for our brand advertising clients. On the other hand, our performance based advertising underperformed during the Q2, unfortunately. The decrease was due to, in my opinion, 2 major factors. 1st, SMEs reduced their overall advertising budgets as a result of the academic and thus more likely to focus their limited advertising budgets toward short form video platforms. Secondly, the popularity of live streaming e commerce resulted in a decline of pragmatic advertising made by our e commerce clients, especially those small and medium sized platform clients. By industry, the top 5 industries of our advertising clients are auto, e commerce, financial services, IT and consumer electronics and FMCG. For us, the fastest growing industry in terms of advertising in 2020 so far is IT and Consumer Electronics, followed by FMCG, which is consistent with the overall trend of Internet advertising. And we expect it to continue to grow in the second half of the year. By and large, in the first half of the year, our e commerce advertising, especially performance based e commerce advertising, has not been performing very well. And we are working hard to try to improve the situation by optimizing our advertising algorithms and recommendation systems. As for the auto industry, we recorded a decline in advertising revenue for the first half of the year. However, the industry has started to recover during the second quarter, and we expect the decline to become more moderate in the second half of the year. Financial service advertising revenues is expected to be roughly flat on a year over year basis. Actually, the advertising market in China is expected to decline by 2.8% year over year in 2020 due to the impact of the COVID-nineteen. In the second half of the year, the advertising market is expected to be affected by the rebound of COVID-nineteen as well as U. S.-China tensions and other issues. However, we are convinced that we will continue to leverage our core competencies to sustain the expansion of our business in this complex and volatile market. Thank you, Gavin. Thank you. Your next question comes from Binbin Ding from JPMorgan. Please ask your question. Thanks for taking my question and congrats on a profitable quarter. My question is on progress of the Yidian Dixin transactions. So you announced an update on the sale of Yidian, after which you will be able to get an additional US100 dollars So this will be held for cash balance to US350 dollars in total. So can management talk about the details in terms of how you're going to use such a bit more cash proceeds? Are there any potential M and A Thank you, Binbin. This is Shuang. As we have announced, we have already entered into a new share purchase agreement with the buyer, have received a second payment for approximately US100 $1,000,000 So after two transactions, we have received US315 $1,000,000 in total. As we all know, the market environment has experienced dramatic changes over the last couple of months. The outbreak of COVID-nineteen, in particular, has disrupted capital markets more severely than many people could have imagined. After evaluating the current operating conditions of Yidian and the conditions of comparable companies in the capital market as well as the funding challenge of the buyer and many other reasons, we finally have agreed on the adjustment to Yidian's valuation. After the adjustment, the overall valuation for the sale of the equity interest in Yidian is still largely in line with current market level. So after considering our own situation and the overall market environment, we believe this transaction is in the best interest of the Yidian and O shareholders. As to the use of proceeds, notably, our net loss in the first half of this year has been significantly reduced compared to the same period last year. In fact, we turned profitable this quarter under the very challenging environment. It is a result of a series of strategic shifts and stringent cost control measures that we have implemented starting in the last year. The completion of Yidian transaction has further strengthened our cash reserves and will definitely put us in a better position to face the challenges ahead despite the volatile market environment. Meanwhile, we will also focus on exploring more opportunities in our online verticals. Our abandoned capital reserve will help us to better seize these opportunities and take our business to a new level of growth. As to potential M and A initiatives, we're going to take a more prudent approach in the light of the current market uncertainties. We're going to focus on core competence. We'll rigorously evaluate the ROI and to think about whether the new target will be supplemental to our existing brand equity and current user base. I hope this answers your question, Bingming. Thank you. It does. Thanks very much. Thank you. The next question comes from Wangzhao Feng from Haiyan Securities. Please ask your question. Okay. Good morning, management team. Thank you for taking my questions. So my question is, could you please further elaborate on your new business initiatives such as Fengfei and the Phoenix app? Okay. Thank you. This is Wang. Fengfei is an advertising platform that we build based on in app ad solutions. The platform enables app developers with less traffic to access our commercial resources, advertising data and service capabilities through a set of advertising monetization solutions. Since its launch, Feng Fei has served nearly 100 APPs with a DAU coverage of approximately 60,000,000 as I mentioned in my opening remarks. In addition to helping APP developers monetize their user traffic, Fengfei also enabled our ads to be distributed on more platforms. So, countenly, we expect Feng Fei to bring additional revenue to our advertising business in the future. As to Phoenix Lab, you mentioned, it is designed to offer review of products and service that are both trustworthy and entertaining in the form of short form videos, thus providing unbiased purchasing advice to China's rising media path. Its Chinese name is Huang Jia Jingce. We are currently focusing our reviews on consumer electronics as we distribute our reviews across all major short form video platforms and social media channels. We have already attracted over 2,000,000 loyal subscribers. In the future, we plan to expand the product categories to include parenting, cosmetics and lifestyle services. We believe that our product reviews in these areas will also strengthen our content coverage in the related verticals. Leveraging our market strength in advertising space, our ability to provide valuable content to our users will help us further enhance the influence of our brands and gain more recognition from our brand advertising clients. That's how the model works. We hope that in the next few years in the next year, Phoenix Lab, Huang Jia Pinghe, will be able to become the go to destination for product reviews in several different verticals. In addition, we will also explore the monetization opportunities for Phoenix Labs through live stream e commerce and offline events in the future. As always, we will actively explore new business opportunities through continuous innovation. We remain committed to strengthening our brand equity, content production expertise and R and D capabilities. The content will also work to expand our user base and diversify our revenue streams through new products and services. Thank you. Thank you so much. There are no further questions at this time. I'd now like to hand the conference back to 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. Ladies and gentlemen, we have reached the end of our conference call. Thank you for participating. You may all disconnect.