Phoenix New Media Ltd Q2 FY2020 Earnings Call

Thank you, operator. Welcome to Phoenix New Media Second Quarter 2020 Earnings Conference Call. I'm joined here by our Chief Executive Officer, Mr. Shuang Liu; and Chief Financial Officer, Mr. Edward Lu. On today's call, management will first provide a review of the quarterly results and then conduct a Q&A session. The second quarter 2020 financial results and webcast of this conference call are available on our website at ir.ifeng.com. A replay of the call will be available on the website in a few hours. Before we continue, I would like to refer you to our safe harbor statements in our earnings press release, which apply to this call as we will make forward-looking statements. Finally, please note that, unless otherwise stated, all figures mentioned during this conference call are in RMB. With that, I would like to turn the call over to Mr. Shuang Liu, our CEO.

Thank you, Qing. Good morning, and good evening, everyone. During the second quarter of 2020, the COVID-19 pandemic continued to cause significant macroeconomic uncertainties as well as substantial headwinds to the entire advertising industry. Undeterred by these challenges, we upheld our commitment to producing premium news content and focused our resources to create long-term growth and sustainable competitive advantages. Consequently, we concluded the second quarter of 2020 with encouraging financial results. Our total revenues were within our previous guidance range. In addition, we delivered a positive quarterly operating income of RMB 25.6 million. Our solid financial performance demonstrates that our prudent cost control measures have been effective in combating the widespread market challenges. It also validates our corporate development strategies as we further upgraded our flagship news app, bolstered our brand influence, and executed new initiatives with favorable monetization potential in the second quarter. On our flagship news app front, we continued to improve the platform capabilities by upgrading its technology, fortifying its content operations, and enhancing its content offerings. As a result, we increased the stickiness of our news app. Our platform's user retention rate grew by 39% year-over-year and the time spent by users on the platform increased by 21% year-over-year. Building upon our experiences in content operations and expertise in AI algorithms, we have constructed a premium content library to cater to the needs of our users. Its core competence resides in the seamless integration of content and algorithms. By combining our editors' professional judgment with our software's automation capabilities, we have put in place a set of rigorous standard operating procedures to ensure both targeted and efficient distribution of our content. Our process starts with our editors as they leverage their vertical expertise and authority, recommend hot topics in their respective fields, and evaluate the content's quality, style, and social values. Then our AI algorithm blends editor recommendations with content categorizations, labels, and user characteristics, utilizing enhanced content profiling and other advanced techniques, and delivers a large amount of content to our users that matches their individual requirements precisely. Consequently, we are able to satisfy a variety of users' demands, switching from client information to fulfilling personal interests and indulging in entertainment. We have also successfully resolved the cold start problem and information cocoons. Above all, by integrating content with technologies, we can recommend content carefully curated by our editors in an innovative and enticing manner to elevate our premium content's exposure, enhance our brand awareness and user resonance, and boost our distribution capabilities. In addition to that, to ensure the timely coverage of societal developments and breaking news events, our seasoned editorial team refined our news monitoring process continuously. Moreover, to better satisfy users' entertainment demands and capture their attention, we optimized iFeng's user interface and introduced fresh content formats such as portrait mode videos and Editor's Pick mini videos. As a result, our platform's thriving stream of innovative, informative, and engaging content further expanded, and our value proposition to iFeng users compounded accordingly. On the brand equity front, we also continued to organize online events during the quarter to enhance our brand image, improve our advertiser value proposition, and generate additional streams of income. For example, in May, we organized iFeng Finance Visual Summit, which was the first large-scale finance event to be held in China since the outbreak of COVID-19. Users throughout the country were highly appreciative of the deep financial and economic insights unveiled during this event. Our related event coverage generated 22.9 million views on our iFeng app, with the event's trending topics recording around 170 million views on social media at the same time. In June, we organized the 'Dialog with the World' online forum in partnership with the National Academy of Development and Strategy, of Renmin University of China. This online forum brought together 32 distinguished guests hailing from all corners of the globe. In the context of the global pandemic, our ability to hold such high-profile online events has proven to be quite effective, enabling us to further augment our brand equity despite our physical constraints and related safety concerns. In line with these online events, we also continued to expand our library of original IP to ensure that our catalog of content offerings remained highly attractive and of superior quality. During the quarter, for example, we continued to produce Jun Pin Tan. This 24-episode weekly show has already delivered outstanding results, as certain episodes of Jun Pin Tan recorded over 18.5 million views on our platform. Besides the success of Jun Pin Tan, we also continued to produce Alliance of Heroes. Initially released in September 2019, the show offers in-depth exploration of the Olympian's journey and has captivated audiences across the country. As a result of the show's swelling popularity, Alliance of Heroes was aired by Bei Jing Satellite TV, one of the most influential satellite TV channels in China. Furthermore, we have already secured a sponsorship deal for the second season of Alliance of Heroes, which we expect to launch in August. The warm reception and commercial success of our high-quality original content once again illustrated the premium nature of our brand. Such influence has enabled our brand advertising business to achieve sustainable growth despite the challenging market conditions. We would also like to note that the challenging macro environment significantly impacted our online real estate vertical in the quarter, making it especially hard for our real estate verticals to achieve their revenue growth targets for this year. In light of these developments, we will remain focused on streamlining this segment's operations, executing new product innovations, and implementing additional cost control measures going forward to safeguard our cash flow and profit growth. Now turning to our new business initiatives. During the quarter, we carefully analyzed a number of business opportunities and boldly set out to launch several new promising initiatives in the fields of advertising, video content, and e-commerce. As for our advertising business, we have built several platforms such as Fengyu and Fengyi to fulfill the diverse needs of advertisers as well as provide customized advertisement solutions to our clients. Following the success of these two platforms, we decided to develop Fengfei, a platform capable of bridging the gap between advertising clients and third-party app developers. By interfacing with over 80 apps to access more than 60 million daily active users, Fengfei significantly improves our advertising clients' reach. On the developer side, Fengfei's ability to help app developers convert and monetize user traffic has set the platform apart from its competition. Going forward, we plan to produce performance-based advertising solutions on Fengfei while also enabling the platform to interface with other immediate DSP platforms. As we continue to cultivate Fengfei, we believe it will also become a new growth driver with the potential to generate substantial returns. To meet the demands of China's rising middle class for practical and unbiased purchase advice, we also upgraded the Phoenix Lab video series for product reviews this year. By the end of the quarter, the Phoenix Lab video series attracted 1.4 million users and generated a total of 43 million views. As Phoenix Lab currently specializes in consumer electronics reviews, we're now mainly focused on establishing brand partnerships in this industry. Nevertheless, as the show's user recognition and advertisers' endorsements continue to grow, we aim to replicate this innovative success formula in other industry verticals going forward. Recognizing the quality and size of our user base, we have also ramped up the development of our e-commerce marketplace, iFeng Wutong Hui. Since its launch, Wutong Hui has been made available to users throughout ifeng.com as well as our WeChat official accounts, and it attracted around 90 thousand followers total on WeChat. Additionally, during the 618 Shopping Festival, we developed a membership system to better facilitate user purchases and boost user engagement. As a result, Wutong Hui facilitated a record GMV of RMB 3.3 million in June. Although Wutong Hui is still at a relatively early stage of development, we believe it has demonstrated substantial potential for monetization and we are optimistic about its future growth prospects. Now let me share an update on the Yidian transaction. As we have announced previously, the current macroeconomic uncertainties have led to some pressure on the buyer's funding resources. However, if the transaction were to be terminated, we would face a series of immediate challenges, such as financing additional investments in Yidian and managing the platform without distracting us from our long-term strategic focuses. As a result, we believe that the current total consideration of Yidian at USD 350 million is within a reasonable range. In addition, after careful consideration and analysis, we are certain that the recent valuation adjustments are in the best interest of all parties and will serve to maximize our shareholder value in the long term. In summary, during the second quarter, we continued to accelerate our growth momentum by upgrading our flagship news app, fortifying our brand equity, and executing new business development initiatives on multiple fronts. While the current macroeconomic uncertainty and industry headwinds make forecasting difficult, we believe that our progress to date has helped set the stage for sustainable growth in the future. Moreover, as we continue to advance throughout the rest of the year and beyond, we plan to remain prudent in our investments and channel our resources only to those initiatives with attractive potential ROI. Looking ahead, we aim to leverage our competitive advantages in professional journalism, abundant working capital, and efficient distribution networks to bolster our new media leadership in China, deliver sustainable growth, and generate increasing shareholder value in the long run.

Thank you, Shuang, and thank you all for joining our conference call today. Before I update you on the financial details, I would like to elaborate on the impact of the disposal of our equity interest in Tadu. On May 18, 2020, iFeng sold all of its investments in Yitian Xindong, which owns and operates the Tadu apps that provide digital reading services. The disposal of Tadu represents our strategic shift in the operation of the online literature business, which had a major effect on our operations and financial results. Therefore, the disposal of Tadu was qualified for reporting as a discontinued operation in our financial statements. Accordingly, Tadu's results of operations have been excluded from continuing operations in the condensed consolidated statements of comprehensive income loss and are presented in separate line items as discontinued operations for the second quarter of 2020 and the prior periods. Additionally, the related assets and liabilities associated with the discontinued operations in the prior year consolidated balance sheet were classified as assets and liabilities held for sale to provide comparable financial information. The financial information and the non-GAAP financial information disclosed in this press release are presented on a continuing operations basis unless otherwise specifically stated. For the details, please refer to our earnings release. Let me take you through our financial highlights for the second quarter of 2020. Our total revenues in the second quarter of 2020 were RMB 312.3 million, which were in line with our previous guidance range and represented a decrease of 9.7% from RMB 345.9 million in the same period of last year. The decrease was primarily due to the negative impact of the COVID-19 outbreak and intensified industry competition. I will provide some additional context on our revenues in the second quarter of 2020. Net advertising revenues in the second quarter of 2020 were RMB 286.3 million, representing a decrease of 7.5% from RMB 309.5 million in the same period of last year. The decrease was primarily attributable to the previously stated reasons. Paid services revenues in the second quarter of 2020 decreased by 28.9% to RMB 26 million from RMB 36.4 million in the same period of last year. Revenues from paid content in the second quarter of 2020 decreased by 29% to RMB 14.2 million from RMB 20.0 million in the same period of last year, mainly due to market conditions as well as the tightening of rules and regulations on digital reading. Income from operations in the second quarter of 2020 was RMB 25.6 million compared to a loss from operations of RMB 75.5 million in the same period of last year. Operating margin in the second quarter of 2020 was positive 8.2% compared to negative 21.8% in the same period of last year. Non-GAAP income from operations in the second quarter of 2020 was RMB 27.8 million compared to non-GAAP loss from operations of RMB 73.1 million in the same period of last year. Non-GAAP operating margin in the second quarter of 2020 was positive 8.9% compared to negative 21.1% in the same period of last year. Net income from continuing operations attributable to iFeng in the second quarter of 2020 was RMB 2.8 million compared to a net loss from continuing operations attributable to iFeng of RMB 69.8 million in the same period of last year. Non-GAAP net income from continuing operations attributable to iFeng in the second quarter of 2020 was RMB 23.7 million compared to non-GAAP net loss from continuing operations of RMB 67.9 million in the same period of last year. Moving on to our balance sheet. As of June 30, 2020, the company's cash and cash equivalents, term deposits, short-term investments, and restricted cash totaled RMB 1.72 billion or approximately USD 243.9 million. Finally, I'd like to provide our business outlook for the second quarter of 2020. We are forecasting total revenues to be between RMB 295.4 million and RMB 315.4 million, representing a decrease of 13.1% to 7.2% year-over-year. For net advertising revenues, we are forecasting between RMB 275.0 million and RMB 290.0 million, representing a decrease of 12.2% to 7.4% year-over-year. For paid service revenues, we are forecasting between RMB 20.4 million and RMB 25.4 million, representing a decrease of 23.7% to 5.0% year-over-year. To conclude, our decision to take the long-term view and prioritize investments capable of delivering quality ROI started to show positive results in the quarter. Such progress is illustrated by our profitability expansion, but more importantly, also by our successful implementation of effective cost control measures, which have helped to make us leaner and place us in a stronger position to achieve our future financial targets. Going forward, to sustain our growth momentum, we will invest in those areas that will improve our product offerings, accelerate the development of our new business initiatives, and refine our operating efficiency. Despite the challenges caused by the outbreak of COVID-19 and the resulting macroeconomic uncertainty, we believe that our competitive brand advantages and effective cost control measures will enable us to weather the current environment and emerge from the crisis stronger than ever atop a foundation built to support our enduring growth. This concludes the prepared portion of our call. We are now ready for questions. Operator, please go ahead.

Could you share some updates on the advertising business in the second quarter, such as recovery status for the brand and performance-based advertising budgets expanding in different verticals, and how do you think about the advertising industry in the second half of this year?

Thank you for the question. Although the overall advertising market continued to be affected by the epidemic in the second quarter, we still managed to grow our advertising revenue by 37% on a sequential basis. Apart from seasonality and holiday effects, our sequential growth was driven by our long-established brand influence as well as our ability to quickly adjust our advertising business development strategy to the new environment. For our brand advertising and performance-based advertising, they accounted for 79% and 21% of our quarterly advertising revenue, respectively. Our strategy to focus on premium content production and technology advancement enabled our organic brand advertising segment to maintain its upward trajectory despite the impact of the epidemic. Actually, during the quarter, we continued to optimize our AI algorithms to meet the diverse needs of our brand advertising clients. We also improved the accuracy of our targeted advertising services and developed new ad products by incorporating new media formats such as live streaming. These efforts enabled us to further enhance the conversion rate for our brand advertising clients. On the other hand, our performance-based advertising underperformed during the second quarter, unfortunately. The decrease was due to, in my opinion, two major factors. First, SMEs reduced their overall advertising budgets due to the epidemic and were thus more likely to focus their limited advertising budgets toward short-form video platforms. Secondly, the popularity of live streaming e-commerce resulted in a decline of programmatic advertising from our e-commerce clients, especially those small and medium-sized platform clients. By industry, the top five industries of our advertising clients are auto, e-commerce, financial services, IT, and consumer electronics and FMCG. For us, the fastest-growing industry in terms of advertising in 2020 so far is IT and consumer electronics, followed by FMCG, which is consistent with the overall trend of Internet advertising, and we expect it to continue to grow in the second half of the year. By and large, in the first half of the year, our e-commerce advertising, especially performance-based e-commerce advertising, has not been performing very well. We are working hard to improve the situation by optimizing our advertising algorithms and recommendation systems. As for the auto industry, we recorded a decline in advertising revenue in the first half of the year. However, the industry has started to recover during the second quarter, and we expect the decline to become more moderate in the second half of the year. Financial service advertising revenues are expected to be roughly flat on a year-over-year basis. The advertising market in China is expected to decline by 2.8% year-over-year in 2020 due to the COVID-19 impact. In the second half of the year, the advertising market is expected to be affected by the rebound of COVID-19 as well as U.S.-China tensions and other issues. However, we are convinced that we will continue to leverage our core competencies to sustain the expansion of our business in this complex and volatile market.

Congrats on a profitable quarter. My question is on the progress of the Yidian Zixun transactions. So you announced based on the sale of Yidian, as a step forward, you will be able to get an additional USD 100 million. So there's a significant cash balance of USD 350 million in total. Can management talk about the details on how you're going to use such a large amount potentially? Are there any financial M&A activities we are looking at?

Thank you, Binbin. This is Shuang. As we have announced, we have already entered into a new share purchase agreement with the buyer and received a second payment for approximately USD 100 million. So after two transactions, we have received a total of USD 350 million. As we all know, the market environment has experienced dramatic changes over the last couple of months. The outbreak of COVID-19, in particular, has disrupted capital markets more severely than many people could have imagined. After evaluating the current operating conditions of Yidian and the conditions of comparable companies in the capital market, as well as the funding challenge of the buyer and many other reasons, we finally agreed on the adjustments to Yidian's valuation. After the adjustment, the overall valuation for the sale of the equity interest in Yidian is still largely in line with current market levels. So after considering our own situation and the overall market environment, we believe this transaction is in the best interests of Yidian and all shareholders. With the use of the proceeds, notably, our net loss in the first half of this year has been significantly reduced compared to the same period last year. In fact, we turned profitable this quarter under the very challenging environment. It is a result of a series of strategic shifts and strict cost control measures that we have implemented starting last year. The completion of Yidian's transaction has further strengthened our cash reserves and will definitely put us in a better position to face the challenges ahead despite the volatile market environment. Meanwhile, we will also focus on exploring more opportunities in our online verticals. Our abundant capital reserve will help us better seize these opportunities and take our business to a new level of growth. Regarding potential M&A initiatives, we're going to take a more prudent approach in light of the current market uncertainties, but we're going to focus on our core competence. We'll rigorously evaluate the ROI and consider whether the new target will supplement our existing brand equity and current user base. I hope this answers your question, Binbin.

So my question is, could you please further elaborate on your new business initiatives such as Fengfei and the Phoenix Lab?

Okay. Thank you. This is Shuang. Fengfei is an advertising platform that we built based on in-app ad solutions. The platform enables app developers with less traffic to access our commercial resources, advertising data, and service capabilities through a set of advertising monetization solutions. Since its launch, Fengfei has served nearly 100 apps with a DAU coverage of approximately 60 million, as I mentioned in my opening remarks. In addition to helping app developers monetize their user traffic, Fengfei also enables our apps to be distributed on more platforms. Consequently, we expect Fengfei to generate additional revenue for our advertising business in the future. Regarding the Phoenix Lab you mentioned, it is designed to provide reviews of products and services that are both trustworthy and entertaining in the form of short-form videos, thus providing unbiased purchasing advice to China's rising middle class. We are currently focusing our reviews on consumer electronics as we distribute our reviews across all major short-form video platforms and social media channels. We have already attracted over 2 million loyal subscribers. In the future, we plan to expand the product categories to include parenting, cosmetics, and lifestyle services. We believe that our product reviews in these areas will strengthen our content coverage in related verticals. Leveraging our market strength in the advertising space, our ability to provide valuable content to our users will further enhance the influence of our brands and gain more recognition from our brand advertising clients. That's how the model works. We hope that in the next year, Phoenix Lab will become the go-to destination for product reviews in several different verticals. Additionally, we will explore monetization opportunities for Phoenix Lab through live stream e-commerce and offline events in the future. As always, we will actively explore new business opportunities through continuous innovation. We remain committed to strengthening our brand equity, content production expertise, and R&D capabilities. We're confident that we will expand our user base and diversify our revenue streams through new products and services.

Thank you, operator. We have come to the end of our Q&A session and our conference call. Please feel free to contact us if you have any further questions. Thank you for joining us on this call. Have a good day.

Thank you all.

Ladies and gentlemen, we have reached the end of our conference call. Thank you for participating. You may all disconnect.