Earnings Call: Q1 2019

May 14, 2019

Earnings release

Ladies and gentlemen, thank you for standing by, and welcome to the Phoenix New Media 2019 First 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, 14th May, 2019. I would now like to hand the conference over to your first speaker today, Qing Liu. Thank you. Please go ahead. Thank you, operator. Thank you and welcome to Phoenix New Media Q1 2019 earnings conference call. I'm joined here by our Chief Executive Officer, Mr. Shuang Liu and Chief Financial Officer, Ms. Betty Ho. For today's agenda, management will provide us with a review on the quarter and also include a Q and A session after the management's prepared remarks. The Q1 2019 financial results and webcast of this conference call are available at ir. Ifeng.com. A replay of the call will be available on the website in a few hours. Before we continue, I 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. I'm pleased to see a solid start in 2019. Our Q1 total revenues reached RMB287.3 million, exceeding the high end of our previous guidance. This outstanding performance was a result of new growth initiatives in our content offering strategy, digital reading and expansion into lifestyle related verticals. We have optimized our flagship product, the iPhone X suspension. We continue to focus our enhanced contenting of AI framework by further improving its synergies with our editorial system. Our successful integration of human expertise and AI algorithm has helped us to improve our ability to generate and distribute high quality unbiased coverage of major events and briefings. It also helps to improve our new delivery efficiency. For example, our coverage of the 2 sessions in March once again demonstrated our preeminence in the field of current major events. During our coverage of the 2 sessions, we fully utilized the advantages of artificial intelligence and our editorial expertise to produce and to distribute hundreds of editorial articles and videos based on our exclusive interviews with influential leaders, all of which were well received by our users. We believe that consumers read news for 3 reasons: to obtain information, to fulfill interest and to be entertained. The good news app should satisfy all three requirements and strike a healthy balance at the same time. The sad reality is that nowadays, there are many news apps that only focus on monetary return and chase after user time using click bait content and fitness. Such practice lead to addictive consumption of worthless and In fact, these practices are also detrimental to New Debt's user retention rate and the commercial interest. Accordingly, we have decided to uphold our professional and moral standards. Furthermore, we continue to carry out our mission of providing truthful, objective and a balanced news coverage to users. In addition to providing high quality coverage of major events and breaking news, we have also strengthened our operating efficiencies in the production of downtime sensitive framing content. This has been accomplished by combining our AI framework data processing power with our editorial team's ability to skillfully curate materials. In fact, we produce and distribute non time sensitive premium content more effectively than ever before, which is evidenced by the increasing time spent from our users. More specifically, the average time spent on our news app during the Q1 increased by 16.4% sequentially. Furthermore, the retention of new users on app increased by 16.9% sequentially in the Q1, again demonstrating the attractiveness of our new content and effectiveness of our content distribution system. Similar to these operational improvements, we also expanded our We media operations during the quarter with a particular focus on our top performing We media accounts. As a result, the number of our top performing We media accounts increased by 25% to 25.2% sequentially in the Q1. In terms of our IP strategy, the initial session of our original series, Super Town, aired in the Q1 and was a smash hit. The 12 episode show recorded over 1,000,000,000 total views online and registered over 600,000,000 interactions on social media. Another example of successful IP creation is the 2nd season of A Journey Through Literature. In the Q4, this show was viewed over 5,000,000 times and praised as the most artistic culture show by the People's Daily and others in the Chinese media industry. In addition, we have a powerful pipeline of new original IP content, including camera from talk, our platform from the Khetan and others, which has the potential to engage a large audience and kick off a reacceleration in advertising roles. The social and economic success of our proprietary content has once again demonstrated our industry leading content production capabilities. Going forward, we remain committed to building competitive IP and providing premium content to our users. We believe both will further enhance our breadth image, differentiate us from our peers and help us expand our user and client base. Now, let's move on to the recent developments of our new growth drivers. I'll first discuss the progress of our digital reading business. In March 2019, we acquired the majority equity interest in Beijing Yitian Xindong Network Technology. This company operates a leading online reading mobile app, Tadu. Following this strategic investment, we utilized Tadu's strong technology development and distribution capability to significantly enhance our digital reading business. During the Q1 of 2019, Tadu launched a free for read model. This model is very successful as demonstrated by increase of DAU, average user time spent and diversification of revenue streams for our digital reading applications. Meanwhile, for the development of ecosystem of IP from Fanyue, we added more audiobooks to our library, increasing our total audiobooks count to more than 13,000 hours in the Q1 of 2019. Our comic books also performed very well. Our hit comic series, A Deal is Deal, and Marriage and Love Junkie, achieved 400,000,000 540,000,000 views in the 1st quarter, respectively. We believe Fanyue and Tadu will continue to work together to create a superior online reading business and help to secure our digital reading business as a long term driver of growth. Lastly, I'll discuss our mobile games expansion efforts. Our entertainment subsidiary, Mio Chu, has developed animated movies and video games based on content from Adventure in the Skies, a story of martial arts originally developed by Phoenix New Media. While the animated series will not be available until the end of this year, its first promo video was an instant success on popular video sharing platform in China. At the same time, Maozio is also actively developing games for smartphones, PCs and other games consoles based on storylines in Adventure in the Skies. We are now working closely with some of the most highly regarded game operators in China and plan to launch our games in late 2019. We not only expect Adventure in the Skies to become one of the most celebrated titles in each genre, We also plan to use it as a roadmap for the creation of future content IP. In regards to Yidian, we are very close to the due date for fulfilling certain closing conditions and expect to complete the transaction by June 2019. Yidian has proven to be one of the most successful investments made in the past several years, and we are pleased to share investment proceeds from the sales of Yidian with our loyalty and supportive shareholders. Having said this, we're still in the midst of a business transformation and have yet to return to profitability. In addition, while the Yidian transaction has provided a handsome return, it also meant that we relinquished an integral piece of our news feed and algorithm development strategy. As a result, we will need to explore additional investment opportunities that are capable of contributing to organic business growth. Therefore, as we consider a dividend plan, we are also trying to strike a balance between rewarding shareholders and ensuring that we have sufficient working capital to fuel future business expansion. In fact, only a handful of companies with ample cash reserves in the Chinese Internet space have paid dividends. Consequently, we have preliminary planned the use of proceeds as follows: 15% to 25% for potential special dividend payment 25% to 35% for investment in content and verticals to accelerate our organic growth and the general working capital and 40% to 60% for strategic investment. This proposed use of proceeds is still subject to the final approval from our Board of Directors. We remain prudent in selecting strategic investment opportunities. We're only willing to consider those investment targets closely aligned with our funding principles, business philosophies, brand image and target audience. As more and more companies reevaluate their traditional marketing strategies in the face of macroeconomic headwinds and industry challenges, our ability to generate accurate and highly relevant sales leads in a variety of niche verticals has made us a new partner for many business and advertisers. In short, we can help them achieve a high ROI with the limited marketing budget. Going forward, we believe that we are well positioned to continue enjoying the benefits of this shift away from the traditional advertising model. We strive to enhance our competitive advantage through the professional editing of content, timely coverage of newsworthy topics and efficient dissemination of information. We seek to differentiate ourselves by similar integrating technology, algorithm and professional judgment, while relentlessly advancing our core competence. We are also actively expanding new innovative ways to monetize our original and proprietary content. We are revitalizing growth through strategic investments in new initiatives, including digital reading and verticals. We are confident that by augmenting our leadership in the new media industry, we will eventually become one of the leading news app in China. With that, I will turn the call over to our CFO, Betty Ho, for final update on the quarter. Thank you, Shuang, and thank you all for joining our conference call today. Now let me take you through our financial highlights for the Q1 of 2019. The amounts mentioned here are all in RMB, unless otherwise noted. The differences between GAAP and non GAAP consist of share based compensation and income or loss from equity method investments, net of impairments. Ifo's total revenue for the Q1 of 2019 were RMB284.9 million, which beat the high end of our previous guidance and were flat as compared with same quarter last year. Non GAAP net loss attributable to Phoenix New Media Limited for the Q1 of 2019 was RMB111.8 million. Non GAAP net loss per diluted ADS in the Q1 of 2019 was RMB1.54. Firstly, on revenue, I will provide details on our revenues for the Q1 of 2019. Net advertising revenue for the Q1 of 2019 decreased by 11.3 percent to RMB216 1,000,000 from RMB243.4 million in the same period last year, mainly attributable to a 9% year over year decrease in PC advertising revenue and a 12.4% decrease in mobile advertising revenue. This decrease was mainly due to macroeconomic headwinds and intense competition. Paid services revenue for the Q1 of 2019 increased by 66.1 percent to RMB68.9 million. Revenues from paid content for the Q1 of 2019 increased 147.8 percent to RMB 52.9 million from RMB21.4 million in the same period last year, mainly due to the inclusion of digital reading revenues from Tadu. Revenues from games for the Q1 of 2019 were RMB3.1 million, representing a decrease of 35%. Revenues from MVAS for the Q1 of 2019 were RMB7.9 million, representing a decrease of 42%. Revenues from others for the Q1 of 2019 were RMB5 1,000,000, representing an increase of 200.8%. It was mainly caused by the increase in revenues from commission generated from online transactions. Non GAAP gross profit for the Q1 of 2019 was RMB108.2 million compared with RMB156.4 million in the same period last year. Non GAAP gross margin for the Q1 of 2019 was 38% compared with 55% in the same period last year. Non GAAP content and operational costs as a percentage of total revenue was 51.1% as compared to 37.1% in the same period last year. It was mainly due to an increase in IP production costs. Revenue sharing fees as a percentage of total revenue was 6.1% as compared to 3% in the same period last year. Bandwidth costs as a percentage of total revenue was 4.9% as compared to 5% in the same period last year. Non GAAP operating expenses for the Q1 of 2019 were 200 and 26,300,000 as compared to RMB210,800,000. Non GAAP operating loss was RMB118,100,000 as compared to RMB54.4 million in the same period last year. Non GAAP operating margin for the Q1 was negative 41.5% as compared to negative 19.1% in the same period last year. Net loss attributable to ifeng for the Q1 of 2019 was RMB119.7 million as compared to net loss of RMB 57.5 million in the same period last year. Non GAAP net loss attributable to ifeng for the Q1 was RMB111.8 million as compared to RMB51.7 million in the same period last year. Non GAAP net loss per diluted ADS for the Q1 was RMB1.55 as compared to RMB0.71 in the same period last year. Now, I will discuss our balance sheet. As of March 31, 2019, the company's cash and cash equivalents, term deposits, short term investments and restricted cash were RMB1.75 billion or approximately USD260,300,000. Restricted cash represents deposits placed as security for banking facilities granted to the company and are restricted in their withdrawal or usage. The increase of cash balance was due to the receipt of the $100,000,000 deposit from the sale of Particle Inc. Finally, I'd like to provide our business outlook for the Q2 of 2019. We are forecasting total revenues to be between RMB374.1 million and RMB394.1 million, representing an increase of 2.8% to 8.3% year over year. For net advertising revenue, we are forecasting between RMB308.8 million and RMB323.8 million, representing a decrease of 2.7% to an increase of 2% year over year. For paid service revenue, we are forecasting between $65,300,000 $70,300,000 representing an increase of 40.3 percent to 51%. This outlook is made in the face of near term headwinds and a macroeconomic slowdown in China that we expect to persist for some time. In light of the greater market conditions, we are taking measures to actively combat these challenges. In addition to that, we are anticipating continuous investments amid the transformation period. Our initiatives, including expanding our own IP productions to cultivate a full IP ecosystem, strengthen on our original content production and enlarging our content library by investing on We media. We are confident that our investment and focus on these initiatives will allow us to enter into a fresh growth cycle. Accordingly, we expect our total revenue for the year of 2019 remain unchanged to increase by over 20%. This includes the prepared portion of our call. We are now ready for questions. Operator, please go ahead. Thank you, Betty. Ladies and gentlemen, we will now begin the question and answer Your first question comes from Frank Chen from Macquarie. Please ask your question. Good morning, Shuang Zhong, Betty and Liuqing. This is Frank from Macquarie. Thank you for taking my question. I basically have two questions. One is on your traditional core advertising business. We experienced a 11% year over year decline in ad revenue in Q1. While our Q2 guidance suggests a relatively flattish advertising revenue, could you share more about what's the driver behind the recovery of our advertising business given the still very weak macro condition in China? The second question is on your new initiatives. Could you share more details on the development of your new initiative, including digital rating and maybe online games mobile games? For the digital ratings, could you share more operating data with us, including the DAU trend, time spent trend? And how many writers do we have? And how do we sign contracts with those with our writers? And for paid online reading, could you share with us how what share with us what ARPU looks like for now? And for the newly launched free online free rating model, could you share some outlook on the potential ad revenue per DAU? And for the online gaming for the online gaming business, it only contributes a very small portion of our revenue for now. And could you share with us what's the potential in this business? And when should we expect meaningful revenue contribution from our gaming business? That's all my questions. Thank you. Thank you, Frank. That was a very long question. I'll take the first two questions. And if there's anything to add, Sean will add. So for your first question regarding the traditional advertising business, we are actually experiencing a transformation period in the coming 2 years. In terms of advertising, we are seeing that advertisers have cut their budgets since Q4 last year and is prolonging to this year due to macroeconomic headwind. Our DSP advertising income is decreasing this quarter or has been decreased this quarter due to the intense competition among the advertising based on performances. Those advertisers' budgets are always going to big players. That's why the competition has becoming very fierce. As a result, we need to strengthen our brand advertising by investing more on innovative advertising solutions, on providing more relevant events, original video content and IP creations, etcetera. We are also diversifying our revenue streams to transactional basis like online literature, e commerce, etcetera. We have laid a very good foundation for our brand advertising to continue to grow. When we adopted the IP strategy last year, as you may as you have heard the script from Shuang that the 3 IPs that we have launched last year were very successful. We are seeing that our brand advertising revenue actually has been increased by 7% this quarter. We will be adding more IP and or original production this year, and we expect that revenue generated from these IPs will be growing at least 300% as compared with 2018. So this is for the advertising income part. And for your second question regarding the digital reading and mobile games, as for digital reading, I'm sorry that we are not providing the operating metrics at this moment because for competitive reasons. At the end of last year, we completed the acquisition of Tadu, and we made this acquisition because we believe that Tadu's technological capabilities and content resources were greatly complementary to ours. Our goal is to establish a complete digital reading IP ecosystem, which leverages our diverse library of intellectual property and to monetize it through a full range of IP products, for example, like audiobooks, movie series, comic and games, etcetera. To achieve this, we are actively expanding our content library and enhancing our technological capabilities. By adding Tadu, it will create synergies on our content acquisition and product diversifications. Tadu actually launched a free reading model early this year, and it was proven to be very successful. That's why we have a better than expected result of Tadu during Q1 this year. As for our gaming business, it has been ongoing for 3 years already. Actually, we have launched Miao Chou about 3 years ago as our game division. This Miao Chou is aimed to provide original and premium entertainment content with an emphasis on traditional Chinese culture. The founder of Nao Chou, Mr. Zhang Yijing, he's known as Gong Tang Jun. He's a veteran game developer with a proven record of accomplishments. His previous productions, including Chinese Paladin, and Source of Legends, Gujianqi Tan. These are all very well received by gamers in China. Zaun has been developing Adventures in the Skies for it to be the full IP operations originated by Phoenix New Media. It will be the novel version has been already published after 3 years of development. Animated movies and video games are on the way. In terms of games, Maocho has already initiated beta testing for its RPG version, which received very positive feedbacks from our beta testers. We are confident that these efforts will ultimately earn us the prestige of a top IP developer and operator in China. So that's all our response to your two questions. Frank? Yes, yes, very clear. Can I have a quick follow-up question on our margin? We are experiencing a loss temporarily. When do we expect a turnaround point in the future? When should we expect a right? As I mentioned earlier that due to the economic headwinds and the fierce competition in the market, we are actually experiencing a transformation period in I expect that it will be for the coming 2 years, we are still at investment period. So at least another 2 more years. Your next question comes from Bin Ding from JPMorgan. Please ask your question. Good morning, management. Thanks for taking my question. I have a question on your growth strategies, especially the organic growth. So I think advertising segment has become a very mature business with a slowing growth across the board, the metaphor of Phoenix or the overall industry. So after the disposal of Yidian, you mentioned a number of new initiatives and strategic investments such as these 2 content verticalization and IP strategy. However, the net of the strong and all verticals, we have seen intensified condition from incumbent leading payers who saw a lot of cash in these areas. I understood that we have committed 40% to 60% cash in strategic investment moving forward. But in my humble view, I think it might be better to concentrate our cash in some very promising areas instead of trying into many different opportunities. So I was wondering if management have identified some very promising areas that could become our organic growth driver in the mid to long run. Thank you. Yes. Thank you, Binbin. This is Shuang. You're quite right that advertising business is becoming a very mature business. But I want to add that it still has room for further improvement. For our core news app in the Q1, admittedly, we experienced a deceleration in its growth. But we have notably improved the efficiency of our algorithm and our content management process. So as a result of push and cold start strategies as well as the integration of AI technology and our editorial expertise, our DAU actually has shown improvement in the Q1. So we are confident about this growth trajectory for the remainder of 2019. It is worth to note through 2019 will still be a year of progress and development for our core news apps. Nevertheless, as we continue to invest in its development, we are laying down a solid foundation for the future growth in 2020. So for our advertising business, we do think there's still room for further improvement. So it will also lead lay down the solid foundation for future growth. And as we mentioned, the strategic investments, we definitely carve out 30% to 40% of our proceeds investment return proceeds for future acquisition and investment. I think, as I said in my opening remarks, the future investment will focus on the area which can achieve release the synergy, which is beneficial to our brand and address the unfulfilled needs of our core users. So the content and AI and vertical areas will be the major focus. Certainly, whether the target can bring a significant will whether the target can significantly enlarge our user base and better release our superior monetization capability is also a top concern. But from the competitive reasons, at the present stage, I cannot disclose too much on the exact target. We have definitely identified several targets. We are in the process of due diligence and negotiations, but it's still not the time to disclose too much details, but we will keep the market updated on this. Thank you, Binbin. Thank you, Songdo. I have a quick follow-up. 4 to 5 years ago, you spent around 1 third or close to 50% of your cash in Yidian investment. So moving forward, are we considering such large amount of investment like what we did 4 to 5 years ago? 4 or 5 years ago. 4 or 5 years ago. Yes, I think that's about the range. Yes, that's about it. In a single company, like $30,000,000 to $50,000,000 of your cash position? It's still too early to tell. Yes. I'll keep you updated. Okay, Thank you. Thank you very much. Thanks for the call. Thank you. Your next question comes from Charlie from First Shanghai Securities. Please ask your question. Hi, management. This is Carmen on behalf of Chuck. And my question is that we don't usually see Internet companies pay dividends and especially when considering that you are still transitioning your business. So what are you doing to what are you going to do to ensure your growth after you pay the dividend? Thank you. This is Shuang. As for the dividend policies, I believe that less than 10% of all Chinese Internet companies have paid dividends in the past. For those who adopt a dividend policy are mostly actually engaged in the gaming business and are profitable. Currently, our market cap is deeply undervalued. And if you multiply the dividend payout ratio as planned, it's equivalent to a large proportion of our current market cap. In addition, we're still in a transitional period and expect to continue generating loss in the near future. So while the Yidian transaction has provided a handsome return, it also meant that we relinquished an integral piece of our news feed and algorithm development strategy. As a result, we'll need to explore additional investment opportunities that are capable, as I said in my opening remarks, that are capable of contributing to organic business growth. The key areas that we can focus include enhancing our AI capabilities, expanding our content library, accelerating our user base expansion, improving the monetization capabilities of our ads, strengthening our brand influence and exploring more investment opportunities in new markets. In fact, we already have identified a few key targets, and we will keep our investor posted on our progress. And given our proven record investment, in last 4 years, we invested in the Zixun and we achieved very handsome return. So we're confident going forward, we'll replicate this legacy. Thank you. Thank you. There are no further questions at this time. I would now like to hand the conference back to Ching. 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 all. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.