Phoenix New Media Ltd Q4 FY2020 Earnings Call

Thank you for joining us today for the Phoenix New Media Fourth Quarter 2020 Earnings Call. I would like to introduce Ms. Qing Liu, who will be your first speaker. Please proceed.

Thank you, operator. Welcome to Phoenix New Media Fourth 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 fourth 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 statement 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 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. We delivered encouraging results in the fourth quarter of 2020 despite the ongoing impact of COVID-19 on the macro economy and its corresponding effect on China's advertising industry. Meanwhile, quarterly revenues were in line with our previously provided guidance range, reaching RMB362.2 million for the period. Our success in the face of such uncertainty further demonstrated the capabilities of our authoritative news coverage and established brand influence, our consistent cultivation of ifeng's content ecosystem, and the success of our new business initiatives. In 2020, the escalation of the COVID-19 pandemic significantly affected people's lives and created one of the most challenging social events. During this period of fear and confusion, our professional journalism enabled us to consistently deliver high-quality news coverage, inform the public about effective virus prevention methods, and dispel rumors through professional fact checks. For example, during the fourth quarter, Human Intelligence Agency, which is one of our we-media accounts, shed light on hot topics such as COVID-19 vaccine development progress and the vaccine side effects through a steady flow of timely, in-depth, and scientific analysis reports. Those reports led to not only strong followings from our users but also frequently published on other social media platforms and gained additional industry recognition from traditional media outlets. In the meantime, our in-depth and comprehensive coverage of the 2020 U.S. presidential election, which originated from our platform and permeated throughout the internet, generated record-breaking viewership. Through our official account of We Vote Alone, our election-related content garnered over 6 billion views. During the run-up to the election, we leveraged Phoenix TV's exclusive live news reports from its North America Station and launched on our platform a second-to-none real-time feature update of ballot counting status, thus accomplishing a viewership of over 10 million on election day. Also, we provided our users with insightful interpretations of U.S. election results as well as their societal and political impacts by hosting exclusive interviews with thought leaders such as Professor Zhang Yong Yang. In addition, through our we-media accounts, we carried tick-by-tick coverage of the daily twists and turns throughout the presidential election and published original commentary on Biden's victory, both of which went viral on social media during the most intense period of elections. To further augment our brand influence, we produced a series of high-profile events during the quarter. For example, we hosted the 2020 ifeng Fashion Awards in December, generating over 1 billion views in total. Also, we organized the 2020 ifeng Beautiful Childhood Charity Gala through cooperation with a number of well-known charities, reaching more than RMB10 million in donations for children in need. Since this event's inception 15 years ago, we have helped to reach a cumulative amount of over RMB227 million. Additionally, our 2020 ifeng Finance Summit at the end of 2020 featured a stellar lineup of distinguished speakers, ranging from state-level signatories to authority figures in the field of politics, finance, and academia such as former Hong Kong Chief Executive, Mr. Leung Chun-ying, and the 2013 Nobel Prize winner, Mr. Robert Shiller. For online reading, by integrating our ample content library and IP production experience, we further explored several new and innovative opportunities such as short-form video series. During the quarter, we brought our key short-form video series to one of China's top online short video platforms. The show has accumulated more than 139,000 followers and 42 million views by year-end, and we were awarded the platform's Best Partner of IP in 2020. Furthermore, in real estate, we leveraged our established editorial capabilities and AI algorithm to launch a new real estate media platform, providing home buyers and property developers with real-time industry information in detailed reports and data analysis. This platform has shown significant monetization potential to date, generating a total contract value of more than RMB30 million. Now turning to our flagship news app, iFeng. We implemented several initiatives recently to enhance our content ecosystem, which will serve as our core growth driver going forward. First, our editorial recommendations and data analysis directed us to enrich our platform content by expanding the number of we-media accounts to ensure that the content remains high quality, differentiated, and appealing to users. Secondly, through a combination of editorial recommendation and algorithm-based user segmentation, we continuously sharpened the quality of our premium content library. For example, by allocating more exposure to our readers' module, we increase users' attainment of high-quality information. Thirdly, by combining our editors' professional journalism with our advanced software algorithm, our team scoured the entire internet to capture the hottest topics, optimizing their aggregation and distributing the related content to satisfy our users' needs for breaking news and trending topics. Additionally, we continue to reinforce our exclusive access to Phoenix TV's video content library to expand our own resources of quality video content, solidify our brand influence, and distribute highly sought-after content across the internet. Moreover, we steadily improved our distribution strength for premium content on other social media platforms to bolster our content exposure and channel additional user traffic back to our own products. By 2020, the number of online video users in China has reached 930 million, and the overall user time spent on online video has also ramped up significantly. Seizing the massive market opportunities emerging from this virtualization trend, we have been proactively developing our video offerings with a three-pronged strategy. The first is leveraging Phoenix TV's massive library of evergreen content to better satisfy our core users' needs for differentiated content and set our brand apart from the competition. The second is developing our unique and original video programs in various verticals to further diversify our content production. The third is identifying talented video content creators who are active in areas that align with our overall content strategy and brand image. By providing them with the necessary support and assistance, we will improve content production efficiency and generate more premium content on our platform. By attracting these top content creators with clearly defined goals and responsibilities, we believe that our content ecosystem will achieve fruitful results in the near future. As we help content producers and short-form video content flourish on ifeng, we have also steadily optimized our AI algorithm and audience segmentation. The average user time spent by users on ifeng grew by 30% on a year-over-year basis, while its user retention rate grew by 23% in the quarter. Now, I would like to provide everyone with an update on our new business initiatives. In November, leveraging our massive base of users who tend to possess advanced education, classic taste, and strong purchasing power, we upgraded our online e-commerce brand to officially launch Phoenix Premium Products, catering to their lifestyle needs. We have formed a team of professional buyers to select high-end products in categories such as fine culture and creativity, food and wine, and health and fitness. By employing rigorous standards in our selection of best-selling products, we will not only achieve higher gross margins but also satisfy demand for better and healthier lifestyles among China's rising middle class. The combination of our massive user base, original content production capabilities, and sophisticated recommendation algorithms has enabled us to reduce our e-commerce customer acquisition costs, enhance our product marketing position, and boost our user retention rates as well as transaction conversion rates. A prime example is our best-selling book product, which overtook the sales of comparable products on other e-commerce platforms and achieved a transaction conversion rate of 43.3%. In 2021, we plan to utilize a live inventory model for e-commerce initiatives, optimize our product collection, adjust our supply chain management, and improve commercial risks for our products. With the continued improvement in our e-commerce initiatives operating efficiency, we should be able to expand profit margins accordingly. Moreover, by leveraging our unique integration of original content production and e-commerce, we will continue to explore innovative e-commerce forms such as live broadcasting and short-form video on other social media platforms to fuel the momentum of our e-commerce business. In conclusion, as we uphold our professional standards of producing authentic, authoritative, and trustworthy content, we have made meaningful progress in enhancing our content ecosystem, expanding our product offerings, and cultivating new growth initiatives. While we recognize the current difficulty in forecasting for 2021, with the economy gradually recovering in the post-pandemic world, we're well-positioned to revitalize our growth engine and generate lasting shareholder value. With that, I will turn the call over to Edward, our CFO, to go through the financial results.

Thank you, Shuang, and thank you all for joining our conference call today. Our total revenues in the fourth quarter of 2020 were RMB362.2 million, in line with our previous guidance range and representing a decrease of 9.5% from RMB400.4 million in the same period of last year. This decrease was primarily due to the negative impact of the COVID-19 outbreak. I will now provide some additional information on our revenues during the fourth quarter of 2020. Net advertising revenues in the fourth quarter of 2020 were RMB336.7 million, representing a decrease of 7.3% from RMB363.1 million in the same period of last year. This decrease was primarily attributable to the previously stated reasons. Paid services revenues in the fourth quarter of 2020 decreased by 31.4% to RMB25.5 million from RMB37.3 million in the same period of last year. Revenues from paid content in the fourth quarter of 2020 decreased by 46.6% to RMB11.2 million from RMB20.9 million in the same period of last year, mainly due to the tightening of rules and regulations on digital reading in China, in line with the broader market conditions, reflecting the trend towards free online reading. Loss from operations in the fourth quarter of 2020 was RMB28.8 million, improving from RMB108.1 million in the same period of last year. Operating margin in the fourth quarter of 2020 was negative 8%, improving from negative 27% in the same period of last year. Non-GAAP loss from operations in the fourth quarter of 2020 was RMB3.3 million, improving from RMB104.2 million in the same period of last year. Non-GAAP operating margin in the fourth quarter of 2020 was negative 0.9%, improving from negative 26% in the same period of last year. Net income from continuing operations attributable to ifeng in the fourth quarter of 2020 was RMB454.8 million compared to RMB902.5 million in the same period of last year. Non-GAAP net loss from continuing operations attributable to ifeng in the fourth quarter of 2020 was RMB8.2 million, improving from non-GAAP net loss from continuing operations attributable to ifeng of RMB99.2 million in the same period of last year. Moving on to our balance sheet. As of December 31, 2020, the company's cash and cash equivalents, term deposits, short-term investments, and restricted cash were RMB1.67 billion, or approximately USD 255.8 million. Finally, I'd like to provide our business outlook for the first quarter of 2021. We are forecasting total revenues to be between RMB210.2 million and RMB230.2 million. For net advertising revenues, we are forecasting between RMB192 million and RMB207 million. For paid service revenues, we are forecasting between RMB18.2 million and RMB23.2 million. Looking into 2021, we are actively implementing measures that can help us overcome the current macro challenges and recover our growth. We will continue to invest in product offering upgrades, content strategy refinements, revenue stream diversification, and user base expansion. Our investments in these areas have already enabled us to develop a strong pipeline for new growth initiatives, thereby unlocking more opportunities for us to explore new and effective monetization systems. Going forward, our combination of content leadership, premium brand equity, and product innovation will continue to serve as key competitive differentiators. As such, we remain confident in our ability to navigate the current industry headwinds and strengthen our position at the forefront of China's new media industry. This concludes the prepared portion of our call. We are now ready for questions. Operator, please go ahead.

Our first question comes from Frank Chen from Macquarie.

Actually, I find it very interesting that you mentioned a few good new business areas in your prepared remarks. Are you going to grow organically, or will you take some sort of M&A to expand your business? So my question is that what's your investment strategy in 2021? Any upcoming M&A should we expect?

This is Edward speaking. I will answer your question. Actually, this year, we have invested RMB90 million cumulatively in three industry-leading venture capital funds. These funds have extensive investment experience and a proven track record in verticals such as video platforms, e-commerce, and interactive entertainment. This investment should not only deliver a handsome return on our investment but also expand our access to new innovation, offering more timely insight into the latest industry trends; and of course, enable us to seek new product opportunities in this constantly changing internet market environment. In verticals such as finance and product reviews, we have made meaningful progress in developing some innovative content-based products and services to serve a wider range of users. Going forward, we plan to explore more opportunities in additional verticals. Our abundant cash reserve should enable us to upgrade our existing products, construct our content ecosystem, and further develop innovative internet products so that we can proactively cultivate growth opportunities for the future. I hope I have answered your question, Frank.

Yes.

Our next question comes from the line of Xueru Zhang from 86Research Limited.

I have a question about the ad industry. So it's good to hear that management comments that the economy is gradually recovering. So I'm wondering if management could elaborate a bit more about the macro outlook and ad budget from key verticals for 2021.

It's a very good question. Actually, 2020 was definitely a difficult year because of COVID-19. For the advertising industry, it was very challenging for sure, although during the second half of 2020, the economy and ad placements started to gradually improve, mainly. However, many industries still have not fully recovered to the pre-pandemic conditions. When we look at our own advertising income, recent pandemic recurrence in certain locations of China, such as Beijing, has affected our execution of some important offline advertising events. Also, the competitive dynamics in the internet industry is constantly changing. So it's more complex for the advertising business. Our sales of brand advertising should actually benefit from the continued economic recovery during the first quarter of 2021. When we look deeper into various sectors of brand advertising, they mainly concentrate in industries such as auto, finance, liquor, and IT. Those industries should continue to recover. Take the auto industry, for example. China's Passenger Union Association reported that auto production and sales lost more than fourfold year-over-year in February 2021. Moreover, we plan to extend our market share in brand advertising for the new consumption sector through cooperating with social media platforms and short video platforms such as Weibo, WeChat, and Bilibili, etc. Those initiatives should lead to increased revenue contributions from the FMCG sector as well. Additionally, as China continues to bring COVID-19 under control, our offline events such as the ifeng Food Festival will take place as planned. Those events should have a very positive impact on the growth of our brand advertising business. Moreover, we will further enhance our content ecosystem and increase our collaboration with Phoenix TV, so we can attract more high-end users, which will increase the average user time spent on our products. All these efforts should be very helpful to our sales growth, and we expect our brand advertising revenue to reach double-digit growth in the first quarter of 2021. For our programmatic advertising business, the oversupply of ads inventory on short video platforms has squeezed the market share of other platforms. Still, in the fourth quarter of 2020, we strengthened our sales and marketing efforts related to our business partners' apps so that we were able to offset the market competition pressure on our programmatic advertising while expanding our opportunities to monetize traffic on other third-party platforms. We expect our revenue from these monetization channels to continue increasing in 2021. At the same time, we allocated more resources to innovating and optimizing features of our existing products, creating a better community environment to increase user retention, and increasing our investment in new product development. The results of our efforts should materialize gradually, leading to an overall improvement in our advertising sales and generating greater long-term value over time. This is my answer to your question.

Our next question comes from the line of Carmen Zhang from First Shanghai Securities.

We noticed that Phoenix TV has announced the change of their management team. So I wonder what's the impact of those changes.

Thank you. This is Shuang. Let me answer your question. Phoenix TV's global reporting resources and original content capabilities have been well respected in the industry, and we believe its potential is yet to be fully unleashed. As you said, Phoenix TV has recently boarded new personnel to their management team. They have extensive international backgrounds, significant media management insight and experience, and deep government and business contacts in Mainland China. We are very confident these two executives will bring vigor and more resources to Phoenix TV. This will accelerate its evolution into a truly global multichannel media group and further unleash Phoenix TV's brand potential, exemplifying its voice on the international media stage, and enabling Phoenix TV to play a greater role in China's steady integration into the world economy. We believe as Phoenix TV's media influence expands, its business value should enjoy greater potential. I hope this will answer your question.

Yes.

There's no more question at this time. I would now like to hand the conference back to today's speakers. Please continue.

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.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.