Earnings Call Transcript - FENG Q1 2021

Operator, Operator

Good day and thank you for standing by. Welcome to the Phoenix New Media First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Qing Liu. Thank you. Please go ahead.

Qing Liu, Manager

Thank you, operator. Welcome to Phoenix New Media’s first quarter 2021 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 first 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 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.

Shuang Liu, CEO

Thank you, Qing. Hello, everyone. Thank you for joining us on our call today. In the first quarter of 2021, the industry-wide competition continued to exert pressure on our business process. We focus on fortifying our core advantages by creating and delivering original, exclusive, and high-quality content and securing our brand advertising baseline while striving to create new growth curves. Additionally, we remain committed to exploring our new business initiatives to augment our revenue source mix. In the first quarter, we continued to demonstrate our leading role in news coverage, especially as a go-to place for breaking news. During the government Two Sessions event in 2021, ifeng engaged in full coverage of the event through our PC and mobile channels, as well as a conference of all major social platforms. Our original news coverage, especially our featured live broadcast, and exclusive content from Phoenix TV generated a record-breaking two billion views across the internet. Our professionalism and credibility in journalism allow us to stand out among other commercial media and gain more interaction opportunities with government officials. Additionally, we published our original interview series with dozens of commissions, scholars, and experts on issues discussed at the Two Sessions, which were widely republished by other domestic and foreign media, such as CCTV Singapore. We’re at the top bar in Forbes China and rank among our viewers' top lists of hot searches. Our coverage extended beyond news articles and short videos. Phoenix TV’s Two Sessions coverage, which included eight important event sessions, was forecasted through our live platform to reach millions of users across the globe. Our results from the Two Sessions speak for themselves. The number of brand advertising clients for the event reached new highs compared to prior years. And our brand advertising revenues from the event increased by 50% year-over-year. Another major event that we covered was a China-U.S. dialogue held in Alaska in March, as the first in-person dialogue between the Chinese government and the Biden administration. This was one of this year’s highest-profile events so far, of the four Chinese media outlets that got access to the event. We were their sole commercial media outlet, capturing the official dialogue while interacting with the Chinese representative outside of the conference rooms and raising questions on general public concerns. We covered the event from various perspectives as the only commercial media outlets on the front line. We published exclusive live video feeds and interviews, most of which were republished by our peers to generate massive user traffic across all major social media platforms. Our coverage of the dialogues and the post-event interviews accumulated more than 700 million views on social media platforms across the internet. Other than news content, our original IP programs, such as On The Cover in our financial vertical and Ifeng Talk in our entertainment vertical, continue to gain popularity among viewers and brand advertising customers. We integrated our vertical team’s expertise in capturing trending topics and social buzz, as well as our core sales teams’ in-depth understanding of our advertisers’ branding needs to create IP programs tailored to those same needs. Consider Jinping Talks, Jinping Time; we delivered this cultural interview program specifically for Xi speakers. Jinping Talks facilitates in-depth dialogue between various industry experts and celebrities aligned with Xi speakers’ broad image in order to effectively market and promote the brands’ products. Moreover, by making our premium IP programs, such as Jinping Talks, available on Weibo and other main third-party social media platforms, we gain access and exposure to a broader audience base, further enhancing our brand recognition and influence. While we actively distributed our content to other third-party platforms and executed distribution strategies tailored to the unique characteristics of each platform, our total number of hours on social media platforms exceeded 100 million in the first quarter. More specifically, our official Weibo account exceeded the 20 million followers mark for the first time and earned 80 hot searches in the first quarter. The increased exposure of our brand on other social media platforms brings us new monetization opportunities. Although we’re still exploring various possibilities, we believe the monetization of our third-party traffic will serve as a new driver of business growth. Now turning to our iPhone app. During the first quarter, in the presence of severe competition from other algorithm-based apps, we put significant effort into enhancing iPhone’s user experience and retention. We implemented a series of upgrades to boost its algorithm efficacy, streamline its content operations, and expand its highly differentiated content library. First, we refined our algorithm to differentiate generic trending social topics from interest-based vertical content and tailored our distribution strategies based on content classifications, allowing us to not only maximize the exposure of these topics across our platform, but also provide our users with easy access to personalized, interest-based content. Furthermore, we refined the segmentation of our user profiles by providing a content flow of aggregated content based on individual user profiles and interests. We continue to improve the user experience of our product. Second, we continued to strengthen the operation of our premium content pool. During the quarter, we focused on maximizing the exposure of the premium content that was closely related to trending hot topics. By providing consistent on complimentary topics and information that users are interested in, we have enhanced the platform’s user experience. In the meantime, we also directed our resources to the production of high-quality articles and videos to further enrich and diversify our premium content pool and enhance the overall content quality of our news app. Third, to provide our users with access to Phoenix TV’s live feeds and classic television programs, we introduced a feature channel in our news app, which further enhanced iPhone’s brand influence and user retention. As a result of the efforts mentioned above, our 30-day user retention rate increased by 10% on a sequential basis, and user click-through rate increased by 3% on a sequential basis. Now turning to new initiatives. During the quarter, we remained committed to advancing various new initiatives to further diversify our revenue streams and augment growth. For real estate, we focus on establishing our B2B influence. One of the B2B products we rolled out was our smart content generation solution, which provides users with key industry updates and analysis on areas related to real estate companies, including their stock price fluctuations, strategic changes, and property development. On the other hand, our digital real estate news service focused on the active operation and distribution of B2B content. By closely monitoring the quarterly earnings results of more than 300 listed real estate companies, the product has helped real estate brands boost their market exposure while also demonstrating its capacity to function as a premium news service for executives, managers, and other stakeholders of real estate enterprises. On the online reading front, we have accumulated an extensive library of premium online literature IP. Our primary goal has been to foster more diverse monetization opportunities for this IP. Our initial work in content reproducing our literature IP was an instant success. By the end of March, our audio channel, Ximalaya, one of China’s largest audio platforms, had over 1.51 million followers and an excess of 570 million plays. We transformed other literature IP into video content; our in-house production of a short form video series has already collected 40 million views since launching on Kuaishou in February. In fact, audiences received the series exceptionally well, earning a spot on the platform’s top five must-watch list. On the e-commerce front, to enhance our e-commerce platform's overall competitiveness, we continue to strengthen our original content production capabilities and personalize content recommendation algorithms to efficiently convert the user traffic we generated from content into e-commerce customers. We also accelerated the optimization of our independent developer e-commerce platform. In the quarter, we upgraded the PC version and WeChat Mini Program of Phoenix premium products to provide a better user experience. As a result of these upgrades, we achieved an increase in user conversion rates on both platforms. More importantly, we’re actively exploring different ways of generating user traffic from third-party platforms through our premium content offerings to lower our e-commerce customer acquisition costs. During the first quarter, for example, we officially launched our e-commerce live streaming feature. The progress we have made so far is quite encouraging. Driven by these combined efforts, Phoenix premium products grew its GMV by 24% sequentially and gross profit by 23% sequentially in the first quarter. In summary, we are aware of the downward pressure on certain segments of our advertising business, and that we are facing existing competition in areas of our new business initiatives. Nevertheless, we have proactively realigned our business strategies to increase user traffic through our exclusive and premium content offerings. At the same time, we continue to invest in new business initiatives to diversify our revenue streams. Going forward, we will stay focused on fortifying our leadership in news reporting, expanding our new media influence, and optimizing our cost structure to build a solid foundation for sustainable business growth. This concludes my prepared remarks. I will now hand the call to our CFO, Mr. Edward Lu, to provide a closer look into our quarterly financials.

Edward Lu, CFO

Thank you, Shuang, and thank you all for joining our conference call today. Our total revenues in the first quarter of 2021 were RMB226.1 million, in line with our previous guidance. This represents a decrease of 2.3% from RMB231.4 million in the same period last year. I will now provide some additional color on revenue during the first quarter of 2021. Net advertising revenues in the first quarter of 2021 were RMB201.3 million, representing a decrease of 3.5% from RMB208.7 million in the same period last year, mainly due to the reductions in advertising budgets from advertisers in certain policy-sensitive industries in the period. Paid services revenues in the first quarter of 2021 increased by 9.3% to RMB24.8 million from RMB22.7 million in the same period last year. Revenues from paid content in the first quarter of 2021 decreased by 11.8% to RMB10.5 million from RMB11.9 million in the same period last year, mainly due to the broader market conditions reflecting the trend towards free online reading. Revenues from e-commerce and others in the first quarter of 2021 increased by 32.4% to RMB14.3 million from RMB10.8 million in the same period of 2020, mainly caused by the increase in revenues from e-commerce and online real estate-related services. Loss from operations in the first quarter of 2021 was RMB41.9 million, improving from RMB70.9 million in the same period last year. Operating margin in the first quarter of 2021 was negative 18.6%, improving from negative 30.7% in the same period last year. Non-GAAP loss from operations in the first quarter of 2021 was RMB40.7 million, improving from RMB68.3 million in the same period last year. Non-GAAP operating margin in the first quarter of 2021 was negative 18%, improving from negative 29.5% in the same period last year. Net loss from continuing operations attributable to ifeng in the first quarter of 2021 was RMB29.2 million, compared to RMB38.6 million in the same period last year. Non-GAAP net loss from continuing operations attributable to ifeng in the first quarter of 2021 was RMB27.8 million, improving from RMB50.5 million in the same period last year. Moving on to our balance sheet, as of March 31, 2021, the company’s cash and cash equivalents, term deposits, short-term investments, and restricted cash were RMB1.58 billion or approximately USD240.9 million. Finally, I’d like to provide our business outlook for the second quarter of 2021. We are forecasting total revenue to be between RMB263.8 million and RMB283.8 million. For net advertising revenues, we are forecasting between RMB244.8 million and RMB259.8 million. For paid services revenues, we are forecasting between RMB19 million and RMB24 million. In summary, we will continue our efforts in producing exclusive and original content to attract and retain our users. We’re also investing in product upgrades to enhance user experience and streamline content operations to strengthen brand equity. In addition, we will continue to explore new monetization strategies, diversify our revenue streams, and improve our operating efficiency. These initiatives, combined with the gradual recovery of the advertising industry, are setting the stage for a recovery of our growth and profitability. This concludes the prepared portion of our call. We’re now ready for questions.

Operator, Operator

Thank you. Your first question comes from Binbin Ding of JPMorgan. Please ask the question.

Binbin Ding, Analyst

Good morning, management. I have three questions. First one is what is the cause between your organic traffic versus external traffic? And can you share these two traffic growth in the future? Second is, what are the major sources of your third-party traffic? And how do you generate that traffic? The third one is, can management also talk about the monetization plan of your third-party traffic in the future. Thank you very much.

Shuang Liu, CEO

Binbin, this is Shuang. Yes, I'd like to talk about our strategy. Starting from last year, we have focused more on organic growth in our traffic. I think especially we are more cautious about the user acquisition strategy. We are more focused on content-driven or brand-driven user growth approaches. So that’s why you can see our marketing expenditure is under control. At this stage, I cannot quantify the portion of organic traffic and other traffic. But I'd like to tell you going forward, a major portion of traffic will come from organic growth, which means it’s going to be driven by our content, by our brand, by our premium content. Regarding our social media outlets traffic, I’d like to share that we have accumulated over 100 million users on third-party platforms. This demonstrates our brand influence, content value, and higher monetization potential. We have already achieved solid progress on WeChat and the viewer-counting ecosystem. Everyday, tens of millions of users consume our exclusive content while engaging in dynamic social interactions on these two platforms. We are also making good progress in expanding our user base on short video platforms like Douyin, Kuaishou, and Bilibili. We plan to promote hosts from Phoenix TV, as well as other partners and opinion leaders who create content that fits our trademark style. We believe these personalized contents in the form of short videos will appeal to and better serve the younger user demographic. Our massive social media user base brings greater monetization potential. Frankly speaking, we have not yet fully utilized these resources. In the first quarter, we launched our filming program to better monetize this enormous social media usage. We’re also in the process of utilizing our professional marketing and planning capabilities to provide brand clients with more options. These services allow us to provide brand clients with integrated marketing services that include placing their brand advertisement on top third-party social media accounts. Massive social media traffic can not only help our existing advertisers reach more potential target customers, but we believe it also allows us to attract advertisers in new industries, especially winning more budget allocations from advertisers in the fast-growing consumer goods industries. So going forward, we will continue to optimize our capabilities to customize original content for third-party platforms to accelerate the exposure of our content and to increase user interactions. As we continue to improve user stickiness on third-party platforms and enhance our monetization capabilities, our user expansion and monetization capabilities will form a self-reinforcing style. I also want to emphasize that we are at the early stages of monetizing our outlets on social media platforms. With more integration and interaction between our portal and also Phoenix TV part, we’re confident we can leverage our TV hosts and their premium content more effectively and further improve the strengths of our brand recognition and further monetize the traffic on these sites. Thank you.

Operator, Operator

Thank you. Your next question comes from Frank Chen of Macquarie. Please ask a question.

Frank Chen, Analyst

Good morning, I have two quick questions. The first one is can you share more additional details about your e-commerce business if you are willing to share more operating metrics? The second question is a follow-up question on your social media initiative. Can you tell us more about the unit economic health and how is your unit user acquisition cost affecting the monetization potential of unit follows? For example, you have over 100 million followers on social media. How should we think of the monetization potential of that amount of followers? And will you get revenue sharing from those social media platforms or now do you have some native ads that you can put inside your content? Thank you.

Edward Lu, CFO

Hi, good morning, Frank. This is Edward speaking. Regarding the first question of our e-commerce business, actually, our progress in the e-commerce business is quite encouraging. On a sequential basis in the first quarter, GMV grew by 24% and gross profit grew by 23%. At this time, the majority of our e-commerce revenues are still generated from our iPhone platform by creating original e-commerce content, such as articles and short videos, and utilizing our content recommendation algorithms. We provide e-commerce services to our iPhone app’s existing users who trust our brand, which allows us to explore and improve the monetization potential of our user traffic. These capabilities have allowed us to quickly build our e-commerce service system, which is tailored to our target consumers, and has a very low consumer acquisition cost. Of course, to achieve more significant e-commerce business growth in the long term, we need to go beyond our existing user traffic. Our e-commerce team has already started to explore different ways of using our premium content to generate user traffic from third-party platforms, such as WeChat. In the first quarter, we successfully organized a series of e-commerce live training sessions on short video platforms such as Kuaishou and Douyin. Throughout these sessions, we collaborated with well-established online influencers for the premium collection of high-quality products at competitive prices. The results were quite encouraging, and we will continue to explore different ways to acquire higher potential e-commerce users on short video platforms. We will definitely continue to refine the fundamentals of our e-commerce business. This business has a lot of headroom for improvements, especially in terms of product selection strategy and acquiring third-party platform traffic at a reasonable cost. Moreover, we need to further enhance our daily operational efficiency to optimize our cost structure, although converting our 100 million social media followers into e-commerce consumers remains a challenge. It also has enormous potential to boost our future goals. Regarding your second question, I'm not sure if I heard you clearly. Actually, we don’t spend much on the user acquisition cost on social platforms, because we provide exclusive and premium content to a lot of channels like Weibo, WeChat, and video platforms such as Douyin and Kuaishou. Users like our content and will subscribe to our accounts on these social media channels. We already have more than 100 million followers on Weibo, WeChat, Douyin, and Kuaishou among others. We believe that this massive user base has significant potential for the future. The business model is actually quite simple. First, brand advertising provides more exposure opportunities for our existing advertising clients so they can reach more potential consumers on our social platforms. This will definitely help our advertising business. Also, this massive user base will support the development of our e-commerce business. As you already mentioned, consumers have shifted from buying only on traditional platforms to more interactive social media platforms. We believe that the future of e-commerce will be more reliant on social media engagement. I hope I have answered your question. Yes. Let me add a few more words. Regarding your second question, I previously answered similar questions. At the beginning, you might want to double-check that. But I want to emphasize that the manifestation of our over 100 million users on social network platforms is at an early stage. As I said, the monetization options include native ads and revenue sharing with third-party platforms. But right now, it’s too early to share the data and the proportion of the native ads and revenue sharing options. However, we’ll definitely keep you updated on this.

Frank Chen, Analyst

Thank you, Shuang and Edward, very clear.

Edward Lu, CFO

Thank you.

Operator, Operator

Your next question comes from Carmen Zhang from First Shanghai Securities. Please ask a question.

Carmen Zhang, Analyst

Hi, management. Thanks for taking my question. Can you tell us more about your advertising business in the first quarter and the main challenges that are currently pressuring your advertising revenue?

Edward Lu, CFO

Hi, good morning, Carmen. This is Edward speaking. Actually, for our advertising business, as the macro economy continues to recover in the first quarter, our brand advertising business achieved a healthy growth rate sequentially. However, from a broader perspective, our advertising business as a whole still faces challenges in future revenue growth. We expect our brand advertising business to continue its year-over-year growth trend in the second quarter, mainly based on the expectation that most of our brand advertisers will continue to experience a rebound. Additionally, as the pandemic continues to be brought under control in China, many offline events can proceed as normal; this will positively impact our brand advertising growth. Nonetheless, in certain industries, notably real estate, we’re aware of the impact from national macroeconomic policies, which will lead to uncertainties in advertising spending. Therefore, we expect the brand advertising to experience more pressure. The increasing execution costs for brand advertising projects also pose a challenge. We need to refine our project management process to better control costs. We’re also adjusting our sales team to balance our sales capabilities across different regions. Besides, we are enhancing our content offering, especially regarding original content. This allows us to expand our influence in areas such as new consumption, education, healthcare, and new energy vehicles. We believe that our influence in these areas will eventually translate into new growth drivers for our brand advertising business. For our programmatic advertising business, overall budget allocation in the market continues to be absorbed by the leading players from video platforms. To survive in such a competitive environment, we must put more effort into upgrading our ad product features accordingly. We have already enhanced the underlying technology of our ad platforms, allowing for more efficient data sharing and ad placement coordination between our platform and advertisers. For our viewer analytics, we have strengthened our data support system for our platforms’ advertising plans in the finance vertical, which helped to improve our conversion rates for clients throughout the infotainment industry. For Fanyue, we extended our business development efforts and converted multiple leading smartphone manufacturers into aligned partners, driving additional user traffic to Fanyue in this quarter. The challenges I’ve mentioned above were aimed at improving the efficiency and effectiveness of our programmatic ad delivery and making our programmatic systems more competitive in the market. Thank you.

Operator, Operator

I would now like to hand the conference back to the management team for closing remarks. Please continue.

Qing Liu, Manager

Thank you, operator. We have come to the end of our Q&A session on 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.