Earnings Call: Q2 2019

Aug 13, 2019

Earnings release

Ladies and gentlemen, thank you for standing by, and welcome to the 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. I must advise you that this conference is being recorded today, Tuesday 13th August 2019. I would now like to turn the conference over to your first speaker today, Ms. King Liu. Thank you. Please go ahead. Thank you, operator. Welcome to Phoenix New Media's Q2 2019 earnings conference call. I am joined here by our Chief Executive Officer, Mr. Shuang Liu and Chief Financial Officer, Ms. Betty Po. On today's call, management will provide us with a review of the proxy results and then conduct a Q and A session. The Q2 2019 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 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. In a macro environment full of uncertainty, we have held steady fast onto our commitment towards continuing growth 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 linear, We have been able to accomplish meaningful progress through a 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 have steadily increased as a result of our integration of AI technology and editorial expertise. Such integration has effectively improved our content quality, optimized our distribution efficiency and increase 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. Judging from our steadily improved operating metrics and positive user feedback and leveraging our unique combination of advanced software algorithm with professional editorial adjustments, we're confident that not only our user traffic will flourish, but also our revenue will grow consistently over the next 2 years. Step by step, we are 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 refine our campaign optimization. These improvements, along with the launch of additional news columns such as 24 hour news, have further improved our daily inventory fill rate. Advertisers are continuously attracted to our platform for our pervasive brand features. 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 Malhotai Group and livestreamed the event. Expert discussions on the healthy development of China's liquor industry and commercial potential of Chinese liquor attracted 3,930,000 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 staff our operation with local talents, customize our advertising solutions to local demands and tailor 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 continue 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, Xinyong, 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 2,000,000 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 per acre in the past 5 years. We're confident that it 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 the our largest and most comprehensive content category. Moreover, to capitalize our fashion verticals' 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 iPhone channels and other third party platforms in the coming quarter. For online reading sector, we continue 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 film and comics. We're exceedingly pleased with Tadu's performance to date and 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 Gaof Player, 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 Gauff Slayers on both platforms. Currently, Gauff Slayers is already listed on Steam and will be available for purchase subsequent to receive government approval. Golf Player has attracted widespread game recognition, receiving a score of 9.6 out of 10 in the Chinese game community, TapTap. In fact, 330,000 registered users to TapTap have reserved the game, indicating their 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 448,000,000. We will now sell 34% of equity stake instead of 32%. As a result, we are still generating a significant return of nearly 6x. Although foreign exchange control and other uncertainty still exist 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 see from the sales of Yidian will be allocated to our development of smart algorithms, production of in house IP content, expansion into lifestyle verticals and the 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 initiatives 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 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 Q2 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 business decreased by 28.5% due to the macroeconomic uncertainties and increased competition. Secondly, I will provide details on our revenue for the Q2 of 2019. Consolidated net advertising revenues for the Q2 of 2019 were RMB300 and 24,800,000, 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 Q2 of 2019 increased by 15.1%. Revenues from paid content for the Q2 of 2019 increased by 126.7 percent, mainly due to the consolidation of Tadu. Revenues from games for the 2nd quarter were RMB2.6 million, representing a decrease of 34.7%. Revenues from MVAS for the 2nd quarter were RMB6.7 million, representing a decrease of 60 2%. Revenues from others for the Q2 of 2019 were RMB7 million, representing an increase of 500 and 13.4%, which was mainly caused by the increase in revenues from e commerce and online real estate related services. Non GAAP gross profit for the Q2 of 2019 was RMB212 1,000,000 compared with RMB230.2 million in the same period last year. Non GAAP gross margin for the 2nd 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 cost as a percentage of revenue was same as last year at 18%. Non GAAP operating expenses for the Q2 of 2019 were RMB286.8 million. Non GAAP operating loss for the 2nd quarter was RMB74.8 million. Non GAAP operating margin for the 2nd quarter was negative 18.9%. Net loss attributable to ifeng for the Q2 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 Q2 of 2019 was RMB66.4 million. Non GAAP net loss per diluted ADS for the 2nd 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 investments and restricted cash were RMB1.69 1,690,000,000 or approximately US245.8 million dollars which included RMB251.6 million from Tadu and RMB8.3 million from Tadu. Finally, I'd like to provide our business outlook for the Q3 of 2019. We are forecasting total revenues to be between RMB373.4 million and RMB393.4 million, representing an increase of 13.4 percent to 19.5 percent year over year. For net advertising revenues, we are forecasting between RMB312 1,000,000 and RMB327 1,000,000, representing an increase of 10.9% to 60.2% year over year. For paid service revenues, we are forecasting between RMB61.4 million 66.4 million, representing an increase of 28.3% to 38.7%. Half of twenty nineteen has gone by. The macroeconomics is not getting any better, and the contents are being further regulated towards the next half of twenty nineteen. Thanks to our diversification strategy in Tadu and Tianbo, their strong growth in Q2 has driven to the increase of our Toiyou consolidated revenue to about 9%. We are confident that our Toiyou consolidated revenue will be increased by around 20% in full year of 2019. In terms of bottom line, we are aiming to break 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. Your first question comes from the line of Frank Chen from Macquarie. Please ask your question. Good morning, Shuang Zhong, Betty and Liu Qing. Thank you for taking my question. In the prepared remarks, Betty reaffirmed that you are targeting at least 20 about think about Q4 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 target in 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 will 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 Song. For the full year of 2019, we are expecting a growth of around 20% because that in general, our Q1 is generally the weakest quarter, and we are seeing the improvement starting from 2nd quarter, 3rd quarter and 4th quarter. And during the Q4, we are expecting a strong growth because most of our IP will be happening during the Q4. That's why the 4th 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 been the also being the same case for Tadu and Tianbo because for traditional advertising business, Q4 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. This is Shuang. Yes, this is Shuang. I will address 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 analysts' efforts in improving our news apps, we are actually seeing steady improvement of our operating metrics and positive user feedback. We're confident I think the trend will continue. By leveraging the blistering growth trend 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 2 to 3 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 the short run, due to our increased investment in new business, in the short run, due to our increased 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 2 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 are confident that our revenue growth will exceed this year's level over the next few years. Your third question is about dividend. 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 constant 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 continued support and patience, now I want to announce that we are planning we are 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 balance in we can balance 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 RMB 15,000,000 deposit. We're very committed to sharing the return on our 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 who will receive further cash deposits of $50,000,000 upon approval by Phoenix TV. As to share buyback, we are because we are still waiting for the pool of the shareholder for the Yidian deal. And also, right now, we have received a total US20 $1,000,000 US200 $1,000,000 US200 $1,000,000 So it's not a time to talk about it, but we want to keep the option open. Thank you, Shuang Zhong and thank you, Betty. Very clear. 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. So you signed a supplemental agreement end of July with another buyer and increased the number of shares being transferred to 212,000,000 at the same price of US480 million dollars So what is the thinking behind such a change? And my second question is a follow-up on dividend payments. 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 parties agreed to close the deal regardless of any dispute raised by any party is back to satisfaction of the closing conditions under the original share purchase agreement. 2nd, from a competitive point of view, the valuations of our comparable companies have been greatly adjusted in the recent period. We see significant down run of the valuation of comparable companies. This trend has led to major revisions to the old valuation model, in turn, our previous valuations. 3rd, China tightened its foreign exchange control 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 6 times the original investment via a significant cash injection. So this is from investment point of view, basically, this is homeland. We are proud of this. As to the timing of the further payment, I want to say that after receiving the 1st tranche of US100 $1,000,000 last week, the buyer must pay the remaining US50 $1,000,000 to us within 2 working days after receiving approval from the Phoenix TV Shareholders Meeting. And after we receive an additional deposit of the $50,000,000 it will distribute US200 $1,000,000 in shares and update the register of shareholders. If the $50,000,000 deposit is not paid in due time, we will compensate the total $200,000,000 previously received. So and also to further reduce the risk of non payment, we have signed a counterpart agreement After we transfer US200 million dollars 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 payment within 3 to 6 months after paying the 1st tranche 2nd, within 3 months after 1st tranche is paid, the buyer makes a payment of the $200,000,000 at a valuation of no less than 1,400,000 and third, the buyer makes a deposit payment of $30,000,000 in addition to the $50,000,000 deposit. So therefore, the additional $50,000,000 deposit and counterparty agreement will serve to significantly reduce the risk involved in the transaction. Yes. Biming, did I answer your question? Yes. Thanks very much. Thank you. Thank you. Thank you. Your next question comes from the line of Chuck Lee from First Shanghai Securities. Please ask your question. Hi, management and 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. 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 not where our strength lies traditionally, we have to admit. However, stemming from our expertise in news operation, professional video content remains in our 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 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 plan 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 service projects. This team will continuously improve our content management, product optimization, sales control development and advertisements. We'll also focus more on the further upgrade of our video app, fengwangshiping. We plan to update everyone with more details in the coming quarter. Okay? Okay. Thanks. Thank There are no further questions at this time. I would now like to hand the conference back to Ms. King Liu. 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. Thank you. Thank you. Thank you, O. Bye. Ladies and gentlemen, this does conclude our conference for today. Thank you for participating. You may now all disconnect.