Earnings Call: Q2 2018

Aug 15, 2018

Earnings release

Ladies and gentlemen, thank you for standing by, and welcome to the Phoenix New Media 2018 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, Wednesday, 15th August, 2018. I would now like to hand the conference over to your first speaker today, Ms. Shing Liu. Thank you. Please go ahead. Thank you, operator. Thank you and welcome to Phoenix New Media's Q2 2018 earnings conference call. I'm joined here by our CEO, Mr. Shuang Liu and CFO, 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 Q2 2018 financial results and webcast of this conference call are available at the Investor Relations section of www.isng.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. Song Liu, our CEO. Thank you, Qing. Good morning and good evening, everyone. We are pleased to report that in the Q2 of 2018, while preserving our strong media DNA, we streamlined our resources and made significant progress in our product and content operations. Experiencing the continuous growth momentum, our advertising revenue generated from our phone app has increased by 43.2% in the Q2 of 2018 under the old accounting standard. During the quarter, we continued to cooperate closely with the government regarding the enforcement of online content regulations in China. For this purpose, we leverage our technology capabilities to optimize our algorithm, significantly augmenting the efficiency and accuracy of our company library's regulatory compliance process. In doing so, we try to strike a fine balance between maintaining market competitiveness and regulation compliance, while upholding our commitment to delivering original, unbiased and high quality news coverage to our users. Now turning to our product innovations. Let me give you an update on our ongoing effort to improve our iPhone News app and our progress in this past quarter. As part of our ongoing effort to gather customer feedback, we organized a social event in June, where we encourage our users to identify our shortcomings and efficiencies. Through the feedback that we received, we were able to improve our products and services. In addition, to ensure the optimal user experience, we significantly accelerated the process of product improvements to once every other week. We believe that our continuous product enhancement will not only maintain and engage existing users, but also attract new users and thus accelerate our revenue growth for the remainder of 2018. The average time spent per users on our video content increased substantially and video content accounted for half of users' total time spent in the Q2. Obviously, with respect to our live broadcast and video streaming strategies, our efforts have already started to bear fruit. Looking ahead into the second half of twenty eighteen, we will integrate video content into our We media operations and aggressively recruit more We media content producers to establish accounts on our platform. In addition, we will produce more short form videos from the enriched content library of Phoenix Satellite TV, of which they have outstanding and high quality content in history, culture and interviews. Meanwhile, we plan to strengthen our original video content production capability in all of our vertical channels. By leveraging the influence and credibility of our brand, we continue to differentiate ourselves from the competition, focusing our original and buyers and high quality news. Building upon our strength, we have increased our investments to further improve our content production capabilities, especially for inclusive content. Recently, we had 2 exclusive high profile reports on 2 influential leaders. 1 was Premier Li Keqiang's speech on the promotion of the World Trade Corporation at 9 China Germany Economic and Technical Cooperation Forum in July. And the other one was Vice Premier, Mr. Liu He, following his visit to the United States. Topics discussed include the latest developments on China U. S. Relationship with our independent commentary. Such exclusive coverage not only created hype in our patients, but also in the frequency of sharing on social media platforms. Not only we aim to provide our users with the latest, the fattest, high quality time sensitive news like content affairs and finance, etcetera. We also like to provide more diversified entertainment and knowledge based non sensitive information to increase the stickiness and time spent and more importantly, the overall experiences of our users. The credibility, our sensitivity and uniqueness of our high quality content, combined with the capabilities of our AI based upgraded smart distribution system, has improved our coverage of major social events. We pride ourselves on the importance of our recent content, especially influence our industry specific critical channels. We analyzed the ROI of our content investments in a concerted effort to optimize the efficiency of our editorial team. We have established multi level standards for our original content using measures such as social media distributions and click through rates, etcetera, to ensure that all the reports and analysis that we generate are of the highest quality for all of our companies. To stay at the forefront of the industry, we are also increasing our investment in the creation of intellectual properties. Proprietary content differentiates us from our competitors. And so we see the continuous innovation of our IPs as crucial to our long term growth. For example, we have pioneered a new form of infotainment that merits elements of talk shows and reality shows with features of documentaries to inform and entertain our users at the same time. Our original content will specifically increase our exposure with upper and middle class and younger demographics. These new and innovative ways of monetizing our IPs will not only increase the considerable influence our brand already has, but also allow us to utilize our strong sales and marketing capabilities. We believe that these additional premium services as well as the brand influence that Phoenix New Media carries will help us further expand our users and client base. Lastly, let me address our strategy concerning our investment in Yidian. During the quarter, Yidian continued its steady growth trajectory in terms of DAUs and revenue. Yidian's DAU achieved high single digit growth compared with RMB60 1,000,000 in April. In addition, building upon the successful partnerships with Xiaomi and Oppo on constant operations, Yidian entered a strategic agreement with another leading handset manufacturer to provide a full range of information services for its web browsers, further accelerating the traffic growth on Yidian. As we mentioned in previous earning calls, the Board of Yidian has been considering the option of listing the company dramatically. Should Yidian choose a listing in the Asian market, will be required to divest our equity interest in it prior to the listing due to PRC regulatory restrictions. We have had discussions with Yidian's key stakeholders as well as Board of Directors. While nothing has been finalized or decided yet, we tend to think that the Asian market is the preferable listing value for Yidian when where it can achieve an optimal market evaluation and thereby provides a better investment return to us when we exit the investment. Taking Yidian's extraordinary performance during the last 18 months into consideration, we believe it is reasonable to expect its valuation to be doubled compared with the previous round of financing, which will generate a sizable return on our previous investments. We plan to channel the potential user proceeds from Yidian transaction to expand our user base and increasing our user stickiness. We seek to analyze our robust growth trajectory through a combination of organic growth and innovation with strategic acquisition. With organic growth, we continue to sharpen the competitive edge of our iPhone News flagship app and fortify our leadership in online news media industry. At the same time, we will also actively explore strategic investment opportunities in complementary applications, especially those that have already established a community of younger demographics. In today's consumption upgrade area, we're working proactively to satisfy Chinese consumers' demand for services beyond shared information editing and distribution. In addition to providing comprehensive information to our users, we're also enabling them to cultivate a happy, healthy and fulfilling lifestyle through an ecosystem we're currently building. Such ecosystem targets the upper and the middle class. It should be comprehensive closed looped and utilized in life related, lifestyle related and mobile ready verticals such as finance, wealth management, housing, food, travel, health, parenting and so on. It should enable us not only substantially improve our user segments, but also expand our business model to encompass transactions or subscription based models and a variety of new revenue streams beyond our core advertising model. Leveraging our pervasive brand influence and our strong monetization capabilities, we're confident that our lifestyle oriented, vertical specific ecosystem will seamlessly complement our existing service offerings. In addition to exploring these new initiatives innovative initiatives, we will maintain our unwavering commitment to strengthening our professional journalism and our leadership in the Chinese online media space. At the same time, we are optimistic that our new initiative will potentially offer better services to our users and enable us to create long lasting value for our shareholders. With that, I'll turn the call over to Ms. Betty Ho. Thank you, Zhuang, and thank you all for joining our conference call today. I'm pleased to announce that we are seeing strong revenue growth momentum from our mobile app. Before I update you on the financial details, I would like to shed light on the impact of the newly adopted accounting standard ASC 606, namely revenue from contracts and customers, which took effect from January 1, 2018. By applying the modified retrospective method under the new standard, Sales taxes and surcharges previously presented as a component of cost of revenues are now presented as a reduction item of revenues and some advertising for advertising data transactions previously not recognized as revenues are now recognized as revenues. For comparative purposes, here we will provide our financial highlights under the old accounting standard, ASC 605. For the amount and ratios under the new accounting standard, please refer to our earnings release where we have provided financial items under both the old accounting standard and the new accounting standard. Now let me take you through our financial highlights for the Q2 of 2018. 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 investments, including impairments. Ifeng's total revenue for the Q2 of 2018 were RMB396.7 million, which is in line with our previous guidance and represented an increase of 0.9% from RMB393.3 million in the same period last year. Non GAAP net income attributable to Phoenix New Media Limited for the Q2 of 2018 was RMB53.7 million, representing an increase of 83.7 percent from RMB29.3 million in the same period last year. Non GAAP net income per diluted ADS in the 2nd quarter increased 81.1 percent to RMB0.74 from RMB0.41 in the same period last year. Starting with revenues. Net advertising revenues for the Q2 of 2018 increased 2.5% to RMB347.3 million from RMB 338.7 million in the same period last year. The increase was due to the consistently increase of 23% in mobile advertising revenue, which was partially offset by a 26.6% decrease in PC advertising revenues, out of which the mobile advertising revenue from fan app grew robustly in Q2, representing an increase of 43.2 percent to RMB200.8 million, compared with the same period last year. Paid services revenue for the Q2 of 2018 were RMB49.4 million, compared with RMB54.5 million in the same period last year. Revenues from digital entertainment were RMB40.1 million, compared with RMB45.6 million in the same period last year, which is due to a 29.3% decrease in the MVAAS revenue, mainly resulting from a decline in users' demand for services provided through telco operators in China. Revenues from games and others for the Q2 were RMB9.3 million, representing an increase of 3.3% from the same period last year. This is mainly due to the increase in revenues derived from other new businesses, while the revenues generated from web based games operated on the company's own platform were still declining. Non GAAP gross profit for the Q2 was RMB230.1 million, compared with RMB226.6 million in the same period last year. Non GAAP gross margin for the Q2 of 2018 was 58%, compared with 57.6% in the same period last year. Non GAAP content and operational costs as a percentage of total revenue was 27% as compared to 26.6% in the same period last year. Revenue sharing fee as a percentage of total revenues was 3% as compared to 3.8% in the same period last year. Bandwidth cost as a percentage of revenues was 3.5%, which is consistent with the same period last year. Sales taxes and surcharges were RMB34.3 million for the Q2 of 2018 as compared to RMB33.2 million in the same period last year. Non GAAP operating expenses for the Q2 of 2018 were RMB196.6 million, as compared with RMB196.2 million in the same period last year. Non GAAP operating income for the Q2 was RMB33.5 million as compared to RMB30.5 million in the same period last year. Non GAAP operating margin for the 2nd quarter was 8.4% as compared to 7.7% in the same period last year. Net income attributable to ifeng for the Q2 of 2018 was RMB49.9 million, representing an increase of 100.2 percent from RMB24.9 million in the same period last year. Non GAAP net income attributable to ifeng for the 2nd quarter was RMB53.7 million as compared to RMB29.3 million in the same period last year. Non GAAP net income per diluted ADS for the 2nd quarter was RMB0.74 as compared to RMB0.41 in the same period last year. Now, I will discuss our balance sheet. As of June 30, 2018, the company's cash and cash equivalents, term deposits and short term investments and restricted cash were RMB1.32 billion or approximately US199.4 million dollars Restricted cash represents deposits placed as a security for banking facilities granted to the company, which are restricted as to their withdrawal or usage. Lastly, I'd like to provide our business outlook for the Q3 of 2018. As we have stated above, the company has adopted the new revenue standard ASC 606 since January 1, 2018. For comparative purposes, we are forecasting total revenues under the old revenue standard. Revenue guidance under the new revenue standard is provided in our earnings release to be between RMB 413.2 million and RMB428.2 million, representing a decrease of 2.9% to an increase of 0.6% year over year. For net advertising revenue, we are forecasting between RMB378 1,000,000 and RMB388 1,000,000, representing an increase of 4.1 percent to 6.9 percent year over year. For paid service revenue, we are forecasting between RMB35.2 million and RMB40.2 million, representing a decrease of 43.6% to 35.6%. In summary, we are pleased to our sustained growth momentum and margin improvements this quarter. As Shuang stated earlier, we will remain committed to strengthening our competitive advantage in our content offering and product innovation to further solidify our market leading position. This concludes the prepared portion of our call. We are now ready for questions. Operator, please go ahead. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Frank Chen from Macquarie. Please ask your question. Hello, management. Thanks for taking my question. I have basically three questions. First on the guidance. The 3Q guidance looks pretty weak, especially you guide the total paid surveys to decline around 40% year over year. Could you share more color on the reason behind this tough way guidance? The second question is on margin. We did quite a good job on cost control this quarter, especially the control over sales and marketing expense. I wonder how should we look at the margin trend in the rest of this year? And do we have an updated budget on the traffic acquisition for this year? The third question is on Yidian. Can you share more color on Yidian's revenue growth and the domestic listing time line? Just to be clarified, will we hold any stake in Yidian after its domestic listing? Thank you, Frank. Let me answer your question first. If John wants to cover additional information, he will add later. So for your first question about the guidance, our actually, our iPhone app advertising revenue increased by 43% in the Q2. It was mainly driven by increasing of pricing and the number of advertisers. But for the rest of the year, we have confidence that the strong momentum of the ad revenue will be continued. We expect the app revenue will be increased at least at Power's Industry at about 40%. We also have new initiatives to boost our revenue growth by creating our own IP and to use big data to enhance our algorithm for our advertisers to be placed to the users at a most relevant way. We have launched 3 IPs originally last year, which potentially could become a lasting IP where we saw high demand from our brand advertisers for our brand advertisers. So, including all these initiatives for the full year, we remain very optimistic that our revenue our advertising revenue will have a double digit growth, as we mentioned in our Q1 earnings call. So, that is for the guidance. And for the paid services, we are seeing further strengthening of the regulations regarding to the MBAS business. The telecom actually in place very heavy regulations on that. So the MBAS services will be further declining at about 40% per year. That actually was very consistent with our previous expectations, so no surprise here. And as for the margin, in terms of the TAC traffic acquisition expenses, as we mentioned earlier, it has last year, we spent about RMB320 1,000,000 in our tax costs. This year, we increased to about RMB400 1,000,000. So we have not increased our budget, but this budget should be enough for the rest of the year. So as for the margin, we remain our expectation. As we mentioned earlier in our Q1 call, it has not been changed. And as for the Yidian revenue growth, as we mentioned earlier, in 2017, its revenue was doubled. And this year, we expected was tripled. And this year, we expect the revenue to be doubled. So and also Yidian CAU experienced in 2 months as compared to April this year has increased high single digit has experienced a high single digit growth from 60,000,000. So it's very healthy and strong growth within Yidian. And as for their Asia listing plan, as we mentioned as Ron mentioned in his script, actually, we don't have a definitive plan for Yidian whether to be listed on A shares or overseas. But apparently, in terms for the valuation, it's better for Yidian to be listed on ATS, but nothing has been concluded. And actually, Yidian has doing its round up financing and is expected to be completed by the end of the year. I hope that answers your question. Zhuang, do you have anything to add? Your next question comes from the line of Natalie Wu from CICC. Please ask your question. Hi, my name is Xiaoming speaking on Hong Kong. This is from Nancy. Thanks for taking my questions. So We can't hear you very clearly. Can you? Yes. Is this okay now? Yes. Better. Yes. Yes. So I was wondering, could management share some plan of future user acquisition? So given that smartphone shipments in China is slowing down recently and we are seeking more diversified channel for user growth and do management have any targets for MAU or DAU in the next year? Thanks. Yes. Hi, this is Shuang. As Betty mentioned in her remarks, actually our total user acquisition cost for the second half of the year will remain the same, will remain unchanged. We're going to hold a very cautious approach to rigorously analyze the ROI on user acquisition. And looking forward for the second half of the year, I think we will do better than the first part of this year. We're going to increase our investment in accounting library, strengthening our algorithm driven competing team and further recruit more talents on our algorithm team to further optimize our user experience. So our goal is to grow our flagship app, iPhone News, more robustly. In addition, we are also internally exploring new product to further increase our user base. But from for competitive reasons, we cannot disclose too much. But this product will definitely focus on younger demographic, will play emphasize our interaction and social networking. And looking forward in the mid term to long term range, as we mentioned in our opening remarks, there is a possibility there is a high possibility we're going to let the Yidian to go public domestically. So that provides us with the chance to exit our investment. So with the potential return of our investment, we're going to also looking at opportunities to do further strategic acquisition to expand our user base, especially in younger demographic. So that's overall our user acquisition and user expansion game plan. Yes. Got it. Thank you so much. Thank you. Your next question comes from the line of Binbin Ding from JPMorgan. Please ask your question. Hey, good morning, Shuang Zhong, Betty Zhang and Du Xing. Thanks for taking my question. I have a question on your content strategy. Can management elaborate on your content strategy in this and next year? And also a related question is your content investment. Can you give us a sense regarding the content budget in this and next year? You mentioned a few key areas of content investments, including self media content, including documentary programs, video, etcetera. So what are the main areas to spend this budget and what's the implication on our profitability? Thank you. Hi, this is Shuang. Thank you for the questions. I think our content strategies covers 4 areas. The first is our breaking news. That's where our expertise lies in. Recently, breaking news kept coming on topics including international relations, economics, entrepreneurship and celebrities, etcetera. User demand for cars and reliable information on those hot topics is emerging. So we will continue to leverage our strength in the timely capture and the professional editing of breaking news and deliver the most insightful and authentic content to our users to increase our brand equity and user stickiness. We shall not diminish, but rather argument our strength in professional editorial content. And secondly, our original content production. I think we recently conducted a summary review of our original content categories. Afterwards, we have eliminated some categories with little traffic, monetization or social impact. Going forward, we will concentrate our resources in providing original content in roughly 20 categories, including culture, affairs, history, fashion, finance, economics and others. We will place a greater emphasis on the productization, monetization and multi channel marketing of our content. Through original content production, we aim to accentuate the uniqueness of our brand, intensify users' reliance on our platforms and enhance our monetization capabilities. And third thing is our We media. Actually, we have reorganized our We Media operation team and put new leadership in place. And we have conducted a thorough review of our We Media user accounts and remapped our course of collaboration with Yidian. We have laid out a more scientific compensation structure for our We media content producers based on their traffic generation results. We also reinforced the coordination between We media and various vertical channels' content production and stressing the top tier We media accounts equipment, operations and monetization in each vertical channel. For competitive reasons, we cannot quantify too much on the exact dollar amount, dollar amount investment in these areas. That will be more than we had expected. But I think this will definitely bear fruits in the mid- to long term range, will further enhance our user stickiness and create even more opportunities for monetizations. And also you mentioned our IP initiatives, our video IP initiatives. For video IP, user attention, as we all know, user attention is increasingly shift toward video content. So are advertising dollars. So advertisers love to sponsor proprietary video content to promote their own brand signals. Phoenix New Media has extensive experience in producing original video content in interviews, histories and culture. So we're exploring a new form of show, which has the perfect combination of elements of both talk show, reality show and interviews. This will help us to attract younger white collar demographics. Starting this year, we have increased our investment in proprietary content production, especially in yes, as I said, in integrating celebrity interviews, talent shows and variety shows. I think because we have very solid advertiser network, We have good advertising culture and history and the celebrities interviews oriented shows. This will not this further increased investment in IP, video IPs will not have significant impact on our bottom line. Maybe, Patty, you have anything to No. Okay. Ding Ding. I hope this answered your question. Yes. That's very helpful. Thank you. There are no further questions at this time. I would now like to hand the conference back to today's presenter. 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. Bye. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.