Earnings Call: Q1 2018

May 15, 2018

Earnings release

Ladies and gentlemen, thank you for standing by, and welcome to the Phoenix New Media 2018 First Quarter Earnings Conference 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, 15th May, 2018. I'd now like to hand the conference over to you for a speaker today, Ms. Nicole Shan. Thank you. Please go ahead. Thank you, operator, and thank you and welcome to Phoenix New Media First Quarter 2018 Earnings Conference Call. I'm joined here by our Chief Executive Officer, Mr. Shuang Liu and Chief Financial Officer, Ms. Bai Ti Ho. For today's agenda, management will provide us with a view on the quarter and also include a Q and A session after the management's prepared remarks. The Q1 2018 financial results and webcast of this conference call are available at the Investor Relations section of www.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 statements in our earnings press release, which applies 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 renminbi. With that, I would like to turn the call over to Mr. Shuang Liu, our CEO. Thanks, Niko. We recorded another quarter of solid results that carried through last quarter's strong growth momentum in our advertising business. Despite of the tightened regulatory environment in China across the entire online media industry, seasonal slowdown during the spring festival in February and strict media controls during the 2 sessions in March. We are pleased to see that our mobile advertisements remain a strong growth driver, recording a 46.3% year over year increase in the Q1 of 2018 under the old accounting standard of ASC 605. Recently, several Internet companies were called upon by the authorities to further regulate their platforms and to ensure that the Internet space is free of vulgar and violent content. As China's leading online news provider, it is our responsibility and obligation to work with the government on enforcement of these policies. Our strong media DNA and our mission to provide high quality professional and high bias news content allow us to stay at the forefront of the media space. We believe the increased media regulation is beneficial to the whole industry by helping foster a sustainable and healthier market and will enable us to further realize our mission as a professional and unbiased media in the mid to long run. Meanwhile, we continue to innovate and upgrade our products and services to enhance our competitive advantage as China's leading information provider. And in order to differentiate us from our peers, we seek to strike 3 balances in our content offerings: the balance between time sensitive news and non time sensitive information, for instance, lifestyle, culture, entertainment or history related information between public concerns and individual interests and between eye catching clickbait with high CTR click through rate while at the expense of quality or accuracy and valuable content that our users generally enjoy reading and are inclined to save and share. Through our coverage of major events and breaking news, we provide our users with timely, high quality and unbiased news and information. We're also a pioneer in utilizing AI while providing editorial recommendation to entertain our users and meet their individual interests. Beyond that, we not only keep our users informed and entertained, but more importantly, as a leading Internet media company, we have always put high emphasis on our mission to instill value, Soft and Prejudice and empower them with premium content. During this quarter, we introduced a number of initiatives for the production of original content across our Internet based verticals. These initiatives are designed to streamline the planning, production and marketing process of our original content. In addition, we've introduced MCNs, multi channel network in suitable vertical channels to enrich our content ecosystem, which, in turn, should help us better meet the demands of our users as well as advertisers. At the same time, we have also allocated more resources towards video content to diversify our content offering, and it's paying off in the Q4 of 2018. We are delighted to report that videos are now surpassing audio, visual and tags to become the most popular form of content on our iPhone News app. We're confident that these highly differentiated content offerings and content operation strategies will further strengthen our brand and help us attract and retain more users. Weizhou, we expect that, in the remaining quarters of 2018, we'll see a significant improvement in our user experience and operating metrics as we put more efforts on our original content, enhance our We media content offering, achieve the aforementioned 3 balances in our content operation and, hence, optimize our content ecosystem. With regard to the advertisers, we rolled out HONGI, a programmatic platform to help our brand advertising clients track and improve the performance of their ads, Starting with clients in the automotive and home appliance sectors, we believe the new platform will allow us to better serve the needs of our clients and maximize their advertising ROI. Specifically, we established copyright sharing partnership with high quality video producer to develop movies, TV shows or mobile games based on the literature IPs we own. For instances, our gaming division is cooperating with a film studio to co develop TV shows and mobile games based on content from Adventure in the Skies, a martial arts literature IP developed by Phoenix New Media. Finally, on Yidian side, we were encouraged by Yidian's solid top line and traffic growth in the Q1 of 2018. Yidian's gross revenue for the Q1 tripled compared to that of the same period last year. We're confident that Yidian's close strategic cooperation with Oppo and Xiaomi, its advanced content operations and its strong monetization performance will enable Yidian to double its full year revenue in 2018. Yidian's popularity was demonstrated by its performance during the 2 sessions in March. Working closely with several mainstream and state law media outlets, Yidian's 2 sessions channel aggregated 870,000 related news stories, averaging 7,120,000 viewers per daily during the 3 week period. 1 of the feature stories, Great Power and New Army, which included over 2,800 related news articles, accumulated more than 100,000,000 views. Following the conclusion of the 2 sessions meeting, Yidian collaborated with China Daily to analyze viewer behavior data. We believe such data analysis will help Yidian improve the quality of its future coverage of national events. As we stated in our previous earnings call, Yidian is our major strategic investment, and we have the right to consolidate Yidian's financial system when certain conditions are met. At the same time, as the largest shareholder of Yidian, we are also open to all viable options to ensure its long term goals and realize its value. One of the many options we are evaluating is a potential listing in China. As you may be aware, recently, the China Securities Regulatory Commission introduced a number of incentives to encourage Unicorn to list domestically in the Asia market, where Chinese companies have significantly higher valuation than their overseas listed peers. We, as Yidian's other shareholders, will monitor the development of the Asia market closely. We'll carefully evaluate all of our options in the coming months and keep everyone updated on any new developments. With this, I will turn the call over to our CFO, Betty Ho. Thank you, Zhuang, and thank you all for joining our conference call today. I'm pleased to announce that we once again delivered solid financial results amid the Chinese New Year and 2 sessions. 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 with customers, which took effect from January 1, 2018, by applying the modified retrospective method under the new standard, sales tax and surcharges previously presented as a component of cost of revenues are now presented as a reduction item of revenue and some advertising for advertising barter transactions previously not recognized as revenues are now recognized as revenue. For comparative purposes, herein will provide our financial highlights under the old accounting standard, ASC 605. For the amounts 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 Q1 of 2018. The amounts mentioned here are all in RMB, unless otherwise noted. The differences between GAAP and non GAAP consists of share based compensation and gain or loss from equity investments, including impairments. Ifeng's total revenue for the Q1 of 2018 were RMB309.9 million, which is at the high end of the company's previous old accounting standard guidance and represented an increase of 5.2% from RMB294.5 million in the same period last year. Non GAAP net loss attributable to Phoenix New Media Limited for the Q1 of 2018 was RMB62.2 million. Non GAAP net loss per diluted ADS in the Q1 of 2018 was RMB0.72. Starting with revenues. Net advertising revenues for the Q1 of 2018 increased to 10.5 percent to RMB266.3 million from RMB241.1 million in the same period last year. The increase was due to the strong increase of our mobile advertising revenue by 46.3%, which was partially offset by a 26% decrease in PC advertising revenues. Paid services revenue for the Q1 of 2018 were RMB43.6 million, down by 18.3% from RMB53.4 million in the same period last year. Revenues from digital entertainment were RMB34.7 million, down by 17.9 percent from RMB42.3 million in the same period last year, which was largely due to a 30.9% decrease in MVAS revenues, mainly resulting from the decline in users' demand for such services provided through telecom operators in China. Revenues from games and others for the Q1 of 2018 were RMB8.9 million, representing a decrease of 19.6 percent from RMB11.1 million in the same period last year. This is mainly because to a decrease in revenues generated from web based games operated on the company's own platform. Non GAAP gross profit for the Q1 of 2018 was RMB155,200,000 compared with RMB133,600,000 in the same period last year. Non GAAP gross margin for the Q1 was 50.1% compared with 45.4% in the same period last year. Non GAAP content and operational costs as a percentage of total revenue is 34.2% as compared to 35.6% in the same period last year. Revenue sharing fees as a percentage of total revenue decreased to 2.8% from 5.9%. Bandwidth cost as a percentage of revenue was 4.6% compared with 4.9% in the same period last year. Sales taxes and surcharges was RMB25.7 million for the Q1 of 2018 as compared to RMB24.3 1,000,000 in the same period last year. Non GAAP operating expenses for the Q1 of 2018 was RMB210,100,000, up by 27.1 percent from RMB165.4 million in the same period last year. Non GAAP operating loss for the Q1 was RMB54.9 million as compared with non GAAP operating loss of RMB31.8 million in the same period last year. Non GAAP operating margin was negative 17.7% as compared to negative 10.8% in the same period last year. The decrease was mainly due to the increase in mobile traffic acquisition expenses as compared with same period last year as we started to increase our tax in the Q2 of 2017. Net loss attributable to ifeng for the Q1 was RMB50 8,000,000 as compared to RMB32.2 million in the same period last year. Non GAAP net loss to ifeng for the Q1 was RMB52.2 million as compared to RMB23.2 million in the same period last year. Non GAAP net loss per diluted ADS for the Q1 was RMB0.72 as compared to RMB0.32 in the same period last year. Now, I will discuss our balance sheet as of March 31, 2018. The company's cash and cash equivalents, term deposits and short term investments and restricted cash were RMB1.3 billion or approximately $207,600,000 Restricted cash represents deposits placed as security for banking facilities granted to the company, which are restricted to their withdrawal or usage. Lastly, I'd like to provide our business outlook for the Q2 of 2018. As we have stated above, the company has adopted the new revenue standard, ASC 66, since January 1 this year. For comparative purposes, we are forecasting total revenue under the old revenue standard to be between RMB396,800,000 and RMB 411,800,000, representing an increase of 0.9 percent to 4.7 percent year over year. For net advertising revenues, we are forecasting between RMB353.5 million and RMB363.5 million, representing an increase of 4.4% to 7.3% year over year. For paid services revenues, we are forecasting between RMB43.3 million and RMB48.3 million, representing a decrease of 20.7% to 11.5%. In summary, by leveraging our brand influence and innovative advertising solutions, we were able to carry our strong growth momentum into Q1 despite of the seasonality factors. Also, as Suang mentioned, we will strengthen our content offerings and enhance our original content to differentiate our product while we remain prudent on the usage of traffic acquisition costs. This concludes the prepared portion of our call. We are now ready for questions. Operator, please go ahead. Thank you. Ladies and gentlemen, we'll now begin the question and answer session. Thank you. And we have our first question there ready from Wendy Huang from Macquarie. Please ask your question, Wendy. Thank you for the management. So first, can you further elaborate on the recent regulations impact on the Phoenix news app as well as Yidian. So how long do you expect the current round of regulation to last for? And also the impact on the revenue, how long would it last for? And also the from the competition perspective, actually, do you actually benefit from any like potential budget shift from your competitors who may actually suffer more from the regulations? And secondly, on the mobile advertising revenue, it seems that it slowed down a little bit recently. Can you give more like specific color on the mobile ad revenue growth into next quarter in 2018? And lastly, can you also provide more detail about the MCM multichannel network that you just mentioned in the prepared remarks? Thank you. Wendy, this is Shuang. Let me answer your question regarding the regulatory challenge. Phoenix has been operating in China for more than 2 decades. We have experienced the market's ups and downs numerous times. But this time, I think it's a one time thing with relatively limited impact. I think it's industry wide tightening of the regulation, not particularly targeting at an individual company. Actually, a bunch of companies, including news apps in the industry, were temporarily suspended in April or be seriously warned or be or even just permanently currently shut down. So many players experienced this round of regulation in one way or the other. During the short period of suspension, I think we tweaked the iPhone News app to ensure future regulatory compliance. So now the iPhone News app is back up and running in APP stores. Revenue wise, I think this round of regulation is, as I mentioned, is the impact is limited. But we believe the increased media regulation is definitely beneficial to the whole industry by helping foster, as I mentioned in my opening remarks, a sustainable and healthier market. Especially for us. I think this we, as a responsible and professional media player in the market, I think this shift of regulatory tone will particularly benefit the media Internet companies with rich content with professional standards. So in the mid- to long term run, I think it's a good thing. MCN is definitely a very important area we are trying to explore. We have specifically a select auto sector, car sector, as the support. We're going to focus on we have recruit talent to set up new team to also set up the game plan for the next year. We're going to invite more self media players in this market. We're going to establish a consortium to help them better to enable us to enrich our content library, to speed up the monetization of rich content. I think the impact will be the good impact will materialize in the next 2 or 3 quarters. So Betty probably can answer the question about the advertising. Hi, Wendy. With respect to the mobile advertising revenue, actually, for the Q1, our growth was very good as expected at about 46.3%, which, actually, you can see it was although it's a very slow season because of the seasonality of the Chinese New Year and the 2 sessions, but because of the low base in 2017 Q1, at that time, we have not introduced our DSP programmatic buying platform yet. So as compared with the last quarter, we did very well this quarter. And looking forward, we are still expecting our mobile advertising going at least with at par with industry grade at about 40%. So for the full year 2018, our mobile advertising will still be continuing as a growth driver for our advertising business. Okay. And also, I want to follow-up on the Yidian. So you also mentioned in the prepared remarks that with the collaboration with Oppo and Xiaomi this year, you expect Yidian's revenue to double in 2018. Can you maybe also share your view on what kind of news feed industry revenue growth do you think it would be? And in other words, will Yidian actually outgrow or grow more slowly than the whole industry? Hi, Wendy. Actually, for Yidian, we just mentioned in our prepared remarks that it did very well. Its DAU actually has increased by 25 percent as compared to same period last year. And also its revenue actually tripled in the Q1 of this year as compared of in 2017. And for the full year, we are still expecting to be at least doubled in terms of its revenue. So Yidian's growth is still very strong and it actually has changed its focus to be focused on browser business. So the total number of DAU actually we can see within that the browser DAU has increased has been increasing significantly. And also in addition to Oppo and Xiaomi, they have also attracted other customers to for Yidian to help with their browser operations. Yidian used Yidian Insight Intel Insight as their browser strategy. So moving forward, I think increasing their operation of the browsers for other handset manufacturers is one of their strategy. This is leveraging on their license because they are being granted with a license and it's so important for them to gain credibility to operate on handset manufacturers' browser. So this for Yidian, this is definitely a strong driver for their future growth. Thanks, Betty. Thanks, John, as well. Thank you. Our next telephone question is from Natalie Ru from CICC. Please ask your question Natalie. Hi, good morning, Shanshu, Yasmeen and Betty. Thanks for taking my question. My question is mainly related to Yidian. Can you share more color on the MAU or DAU trend for Yidian? And just want to confirm that the RMB1 1,000,000,000 valuation was actually the valuation negotiated almost 2 years ago for Yidian, right? And Phoenix New Media still holds about 42% of Yidian. And also, what's your expectation for Yidian's current valuation given the industry leader, Total has just said that it raised its valuation to US35 $1,000,000,000 and also smaller player in this same field, Qutoutiao said to have US2 billion dollars to US3 billion dollars valuation within this year. And Shantou, as you just mentioned in your prepared remarks, Asian market seems to be more appropriate for Yidian. Does that mean that you will seek for chances that Yidian may be listed in Asia market? Okay. Natalie, this is Betty. As With respect to the Yidian MAU, we actually never disclosed the MAU. But for its DAU, as I said earlier, we recorded an increase of 25% year on year in terms of DAU for the Q1 of 2018 for Yidian. And as for the valuation, you mentioned about some other players in the market. We actually also are studying their valuations. We concluded that their valuation is around 10% to 15% of their revenue. So we actually when we did Yidian Rangy for our RMB1 1,000,000,000 valuation for Rangy in late last in late 2016, at that time, our valuation was about 1,000,000,000. 1,000,000,000, which represented about 12 times of our revenue. So I think moving forward for our own app, you should I've given you the industry reference and our own reference. You should have a sense of what kind of valuation that we are looking for. As for the 3rd question, Song will be answering your question. Yes. Let me add a few words about your second question first. Actually, if you conduct a careful comparison between Yidian and other players, think in round Yidian, our the valuation, you're quite right, is set almost 2 years ago on both user scale and revenue scale is quite smaller than our current level. And also, as you mentioned, that some other players also finished financing in the last couple of months. In terms of the revenue and user scale and the policy treatment, I think we stand in a much more superior position. So we are pretty optimistic about our round F financing. As to the future listing, actually, we have because of the latest development in the market, China's CSRC issued new guidance and initiatives, which particularly favor company specializing in AI industry with market cap more more than RMB20 1,000,000,000. So, I think Yidian will pretty soon fit into that category. So, it definitely opened another give us new options. So we're going to balance all these the pros and cons and to decide where is the best venue for our future listing. I think in the next 2 or 3 quarters, this will be pretty clear. Great. Thank you for the color and congratulations on the progress Yidian made. Just to confirm the shareholding, you have 42% stakes in Yidian, right? Almost close to 40%, actually. After closing after RMB financing, our total holding is close to 48% or 30%. 38.6%. Yes. 38.6%. Got it. Got it. Thank you. Looking forward to the future financing of Yi Chen. Thank you. And our next question is from Binbin Ding from JPMorgan. Please ask your question. Hey, good morning, Shuang Zhong, Betty and Nicole. Thanks for taking my question. I have 2 here. My first question is on video. You mentioned video has become the most popular content format on your mobile app in the Q1. So can you give us any color regarding the user or time spent contribution from video content on your platform in the Q1? Have you seen any impact from the emerging and more entertainment oriented short video apps to your overall time spent? And also, it will be great if management can comment on your overall video strategy going forward. My second question is on your mobile ads. So for the Q1, your mobile ad revenue has grown by 46% in the Q1. So I was wondering if you can give us any detail regarding the drivers behind this. How much is coming from traffic? How much is coming from a load increase and coming from pricing as well? And also if management can comment on the future trend of these metrics, that would be great. Thank you very much. Yes. This is Shuang. Actually, video is, as you rightly write, is one of the most important areas we're going to focus on. Starting from this year, based on our data, our users' video time spent increased significantly. On a year on year basis, actually, 6 month basis, it increased by 30%. So it's quite encouraging. And we are also exploring new products to explore the future opportunities and take advantage of the video trend because we are a company controlled by Phoenix TV. So we have very rich content library. Even though the from regulatory point of view, some sensitive current affair video may not be directly put on our platform, but the content in lifestyle, cultural and entertainment is still available. So that gives us unique competitive advantage. Entertainment is also a big trend. The users' time spent on this is also increasing. But as I mentioned in my opening remarks, we try to strike a balance among users' experience because video will definitely increase the users' time spent, but not necessarily increase the not necessarily increase retention rate. So there's a delicate conflict. So we want to not only inform our users, but also entertain our users. But beyond that, we want to provide them with quality viewing experience. So we want to strike balance between the time sensitive news and non time sensitive information. Between the video and click through oriented content and also between also the quality, premium content, So, we not only increased our user time spent, but also increased retention rate. So, it's not rocket science, it's art. But that's something I think we are very good at. By sticking to this by trying to strike a balance between this, I think we will further increase our brand awareness, we'll increase our user retention rate and both users' time spent. Betty, probably can. Yes. Hi, Binbin. Let me address to your second question. As for our mobile advertising revenue, you mentioned that we did very well in the Q1 and why was that? It was mainly due to the as I mentioned earlier, we had a very low base in 2017 because during the Q1 of 2017, we haven't started the DSP yet. And for the Q1 of 2018, actually, the growth driver is still being the mobile advertising revenue and it actually has exceeded over 65%. It has reached 67% as total advertising revenue. And for the full year, we are expecting it to be increased to over 70%. So, the portion of the mobile advertising revenue actually exceeded far exceeded the PC revenue already. So, it actually offset the decreasing of the PC revenue the decreasing of the PC revenue. And also, the driver also because of the number of customers number of advertisers we had. During the Q1 of 2018, our number of advertisers has been increased by 130%. So, we see our client base actually has been expanded significantly. And although the ECPM remain about the same as the previous quarter, because as I said, if we are comparing the Q1 of 2017, it hasn't started yet. That's the driver for our mobile advertising. We are expecting it continues to grow strongly at least with at par with industry at about 40%. Looks like there's no more further questions at this time. I'd like to hand the call back to the speakers for any continued remarks. 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 further questions. Thank you for joining us on this call. Have a good day. Thank you. Thank you. Ladies and gentlemen, thank you for participating. You may all disconnect. Goodbye.