Phoenix New Media Ltd Q3 FY2021 Earnings Call

Thank you, operator. Welcome to Phoenix New Media's Third Quarter 2021 Earnings Conference Call. I'm joined here today by our Chief Executive Officer, Mr. Shuang Liu; and our 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 third quarter 2021 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'd 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 the conference call are in RMB. With that, I would like to turn the call over to Mr. Shuang Liu, our CEO.

Thank you, Muzi Quo. Hello, everyone. Thank you for joining us on our call today. In the third quarter of 2021, we continue to navigate an uncertain macro environment while remaining committed to content leadership and building our core competitive differentiation in original content production capabilities. We have collaborated more closely with our parent company, Phoenix TV, following its equity restructuring earlier this year. This collaboration strengthens our continued focus on enhancing our content offerings, marketing solutions, and industry resources to create a cohesive and innovative media company. We have substantially increased the depth, breadth, inclusivity, and credibility of our news coverage by integrating Phoenix TV global network reporters with both our massive online user base and our ubiquitous presence on social media platforms. This deeper collaboration with Phoenix TV also allows us to synergize our resources on the client base, creating a richer and more comprehensive suite of marketing solutions for a broader advertiser base. Additionally, increased exposure of our new media elements embedded in Phoenix TV's programming content will help raise our brand awareness with high-end TV audiences. During 2021, in conjunction with Phoenix TV, we reported on various major world news events, receiving widespread acclaim for our coverage both in China and abroad. These reports included coverage during this quarter of two major events: the withdrawal of U.S. troops from Afghanistan after a 20-year-long war; and the 24-hour rolling commemoration of the September 11 anniversary. Utilizing Phoenix TV's expertise in live reporting and our highly effective planning and coordination with our frontline reporters, we demonstrated our unparalleled credibility in live reporting. These coverage efforts involved interviews, dialogues, retrospective clips, and live interactions with our users, and were broadcast across several media distribution channels, including our iFeng APP, cable, and satellite TV. As a result, the two reports generated over 100 million video views and 60 million article clicks online. At the same time, our original columns complemented the coverage of these events by providing our users with a broader perspective. For example, our social investigative column Living focuses on the stories of the first witnesses of the September 11 attacks, while our international commentator column Trend on forward-looking statements centered on the topics of anti-terrorism. Our science discovery column, Tumor Intelligence Agency, on the other hand, brought our users' attention to victims who had sustained physical suffering from the attacks. Our original content has been viewed 3 million times on our platform and over 10 million times on Weibo. In addition to our global news reporting, we remain conscious of our social responsibilities, especially during difficult times. In late July, we were one of the first media organizations to realize that the record-breaking rainfall in Hunan province was developing into disastrous flooding that required urgent media coverage. Our live broadcasting and in-depth reporting captured not only the severe damage caused by the flood but also the heroic rescue efforts. Our coverage showcased the courage and kindness of those affected, raising public awareness and inspiring people to donate to the victims of the flooding. Following the disaster, our signature column produced insightful analysis on climate issues for audiences, receiving 1.85 million views on our WeChat official account alone. Our investigative column, Eye of the Storm, focused on the aftermath of the floods, specifically compensation for victims’ losses, and was republished by both mainstream media and other We-media accounts. Now let's take a closer look at Eye of the Storm, an original investigative column we launched last quarter. This uniquely branded column has continued to evolve, receiving recognition as a leader in its field and widespread praise for its contributions to corporate governance enhancements and improvements in overall industry standards. The column tracked highlighted trending hot topics, such as enterprise safety, financial and credit risk, product safety, and more. Combining our integrated reporting methods and undercover investigations, we published over 100 topics during the third quarter under the column, gathering 30 million views in total. Moving on to our new MCN platform launched early this year. By the end of the third quarter, the number of our contracted creators, both domestic and overseas, almost doubled, and we have produced hundreds of premium videos and generated over 10 million followers across all the third-party platforms. The subjects covered range from global topics to broad informative categories, including finance, wellness, and law. In terms of the monetization of MCN, during the quarter, our creators in Japan showcased our video marketing capability. They demonstrated this capability by filming a video showing life in Japan during the pandemic with our advertisers' products embedded in the video. This customized content helps advertisers tell their brand story with a focus on international expansion and development. We're still in the process of expanding our network and extending our system to overseas social platforms. This global network will help us meet our clients' ever-growing demand for overseas marketing. While we continue to enrich our content libraries, unlocking the commercial value of our large user base on third-party platforms remains one of our priorities. Since the second quarter, we have carried out a more systematic approach toward operating on these platforms, including setting the tone and the style of each account and adjusting performance evaluation metrics. We're glad to report that these efforts have produced positive results as the number of followers on our six top mid-tier social accounts grew by hundreds of thousands in the third quarter. All our accounts on third-party platforms have grown significantly. The Weibo app has expanded the scope of product reviews from electronic products to fast-moving consumer goods. We have also extended our advertiser focus from tech brands to broad lifestyle-related products such as cosmetics and health and wellness spreads. This has helped us to deepen our presence in sectors where we were previously underrepresented, shifting to a more balanced client mix. On a sequential basis, the total number of followers of our Phoenix Lab column increased by 24%, and its revenue increased by 31.5% in the third quarter. Now let's take a look at our iFeng app. We have vastly improved its user interface and page layout to better incorporate exclusive content from Phoenix TV. We have included more highlight video clips of classic Phoenix TV programs in order to cater to growing demand for short-form videos and optimize the live forecast and playback functions to improve user experience. In terms of content distribution within the app, we enhanced the recommendation algorithm by selecting and distributing content from high-quality and popular We-media accounts. This method of content delivery complements our interest-based distribution strategy. As such, the CTR and the reading completion rate of related news pushes have greatly improved. We have also enhanced the quality of feedback on our content by increasing the weight of reviews from core users in certain interest areas and reducing the weight of reviews from less active users. Following these adjustments, the quality of our distributed content was optimized, and our click-through rate increased by 30%. Finally, I'd like to share our progress in revenue diversification. For online reading, we continue to make progress in expanding monetization channels for our premium IP content. In the last quarter, we reached an agreement for a two-year strategic cooperation and authorized various platforms to access our audiobooks. Meanwhile, we completed building our audiobooks recording team and started over 30 new recordings, building a pipeline for future operations. As for e-commerce, this quarter, we'll continue to execute our differentiated merchandising strategy for culture and creativity on the one hand, partnering with museums and preservers of national cultural heritage to ensure the conservation of scarce cultural products. On the other hand, we launched the Phoenix master column on social and video platforms, an original content series on cultural innovation that has attracted considerable traffic. For health and wellness, we incorporated selections for crafted houseware, gourmet food, clothes, and accessories. Finally, regarding our real estate vertical, we anticipate a challenging environment going forward as government regulations tighten and the risk of Evergrande group defaulting increases. In response, we are proactively optimizing our client base structure and focusing on real estate companies with relatively healthy balance sheets and strong shareholder backlogs. Additionally, we are rigorously undertaking new business initiatives beyond advertising along the industry value chain to create a new growth curve. In summary, during the third quarter, we've maintained our strategic focus on extending our client verticals, expanding our international presence, optimizing our products, and growing our monetization capabilities. While we continue to face pressure due to current macro uncertainties, we plan to remain prudent in evaluating business initiatives, realigning lines of business with shifting industry dynamics, and elevating our brand influence through consistent delivery of original content. With that, I will now turn the call to our CFO, Edward Lu, to provide a closer look at our quarterly financials.

Thank you, Shuang, and thank you all for joining our conference call today. Our total revenues in the third quarter of 2021 were RMB244.6 million, representing a decrease of 19.3% from RMB303 million in the same period of last year. I will now provide some additional color on revenues during the third quarter of 2021. Net advertising revenues in the third quarter of 2021 were RMB216.6 million, representing a decrease of 23% from RMB281.3 million in the same period of last year, mainly due to reductions in the advertising spending from certain industries during the period. Paid services revenues in the third quarter of 2021 increased by 29% to RMB28 million from RMB21.7 million in the same period of last year. Revenues from paid content in the third quarter of 2021 increased by 69.7% to RMB15.1 million from RMB8.9 million in the same period of last year, mainly due to the increase in revenues from licensing fees related to audiobooks. Revenues from e-commerce and others in the third quarter of 2021 increased by 0.8% to RMB12.9 million from RMB12.8 million in the same period of 2020. Loss from operations in the third quarter of 2021 was RMB206.3 million compared to a loss from operations of RMB28.4 million in the same period of last year. Operating margin in the third quarter of 2021 was negative 84.3% compared to negative 9.4% in the same period of last year. As mentioned earlier, we continue to face increasing challenges from a challenging industry landscape as well as the macroeconomic slowdown in the third quarter. These headwinds were particularly strong in the real estate sector, where we incurred RMB140.4 million in bad debt expenses from certain debtors. Non-GAAP loss from operations in the third quarter of 2021 was RMB204.8 million compared to a non-GAAP loss from operations of RMB26.7 million in the same period of last year. Non-GAAP operating margin in the third quarter of 2021 was negative 83.7%, compared to negative 8.8% in the same period of last year. Net loss from continuing operations attributable to iFeng in the third quarter of 2021 was RMB134.0 million compared to a net loss from continuing operations attributable to iFeng of RMB0.9 million in the same period of last year. Non-GAAP net loss from continuing operations attributable to iFeng in the third quarter of 2021 was RMB135.4 million compared to a non-GAAP net income from continuing operations attributable to iFeng of RMB1.3 million in the same period of last year. Moving on to our balance sheet. As of September 30, 2021, the company's cash and cash equivalents, term deposits, short-term investments, and restricted cash were RMB1.57 billion, or approximately USD 243.5 million. Finally, I'd like to provide our business outlook for the fourth quarter of 2021. We are forecasting total revenues to be between RMB256.1 million and RMB276.1 million. For net advertising revenues, we are forecasting between RMB239.7 million and RMB234.7 million. For paid service revenues, we are forecasting between RMB16.4 million and RMB21.4 million. While we remain committed to fostering our competitive differentiation in original content, such efforts may cause volatility in our profit margin in the near term. We plan to enhance our business resilience by proactively managing our expenses, optimizing our operations, and improving our revenue stream mix. Leveraging our collaboration with Phoenix TV, we are convinced that we will be able to navigate through adversity and increase shareholder value in the future. This concludes the prepared portion of our call. We are now ready for questions.

I wonder if you could share some color on your business outlook? And also any measures we are going to take to regain the growth momentum?

Xueru, this is Edward speaking. Actually, we do face many challenges with our brand advertising business. There is intense competition, and our advertisers are being affected by the macro environment and regulations as well. This all has a negative impact on us, but we must face these challenges and thoroughly review our business and analyze our strengths, weaknesses, as well as future opportunities. We have done a thorough analysis on the drivers behind each part of our advertising revenue and set strategic goals and action plans accordingly. Our active users drive our programmatic advertising revenue. We made plans to increase the overall user retention and the time spent in our app. For our targeted user groups, we are upgrading our app to allow more user interactions and increasing the richness of our content. We have to continue to invest efforts in our product to increase its commercial value. In terms of brand advertising, we need to focus on two parts: increasing the number of clients and increasing our pricing premium. On one hand, we are actively expanding our client base. We are upgrading our marketing resources to tailor to a wider client base. For example, our project works closely with colleges. It caters to advertisers who are targeting younger markets. Our Phoenix Lab helps us reach out to advertisers in the FMCG sector through professional product reviews. We use our expertise in product testing and media influence to endorse and promote our advertisers' products. Also, we have millions of followers on MCN and third-party platforms, providing advertisers with a wider selection of channels for marketing, increasing their exposure through the Internet. Our overseas content creator network helps us to reach customers with globalization needs. Aside from growing our customer base, we also continue to elevate our brand influence as key to our pricing premium. Our brand influence is reflected in our original content and offline events. We will optimize our resource allocation to gain more support for our trademark content and events. By doing so, we hope to maintain and enhance our brand awareness to guarantee our advertisement premiums.

So this quarter, we saw that the company has built up large amounts of bad debts due to Evergrande's credit risk. So management, could you further explain the impact of Evergrande on your business operations? And also perhaps give us some color on what impact it will have on the company's future business?

Thank you, Alice. You're right. Evergrande's liquidity issue had a big impact on us this quarter. We are paying close attention to the situation. Of course, we will continue to follow up on the overdue balance. But on our financials, to be prudent, we have fully written off our accounts receivable and the notes receivable from Evergrande. The impact on this quarter's operating income was a loss of RMB140 million. So in terms of bad debt, we have always followed relevant accounting standards, and we always work closely with our auditors to ensure we take sufficient provisions. For the first half of the year, Evergrande didn't show signs of major default risk. But in the third quarter, we started to see red flags in the market. At the same time, they delayed paying us on time. Considering there is huge uncertainty about whether we can collect these accounts, we had to take a full provision in this quarter. However, there will be no additional bad debt expenses from Evergrande in the future. As to the impact on our future business, most of our work with Evergrande is advertising on their cost per time model. The gross margin was relatively good, and we had been receiving payments from them until September this year. Losing this chunk of business means our top and bottom line might be negatively impacted in the future, and we need to work extra hard to make it up. Our team is now actively expanding our client base with good credit and relatively healthy balance sheets. Also, we are actively exploring business opportunities along the upstream and downstream of the real estate industry chain.

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 today on this call. Have a good day.