Earnings Call Transcript - FENG Q2 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Phoenix New Media Second 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. I must advise you 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, Moderator

Thank you, operator. Welcome to Phoenix Media's second quarter 2021 earnings conference call. I'm joined here by our Chief Executive Officer, Mr. Shuang Liu; Chief Financial Officer, Mr. Edward Lu. On today's call, management will first provide a review of the quarter results and then conduct a Q&A session. The second 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. During the second quarter of 2021, we continued to encounter downward pressure as competition intensified, regulation tightened, and advertisers remained cautious with their budgets. As our core competitive differentiation lies in our regional accounts and production capabilities, we have upheld our commitment to originality and revamped our content strategy. We believe that our newly augmented cost metrics will lay a solid position to attract new users, increase their loyalty, and generate a sustainable revenue stream. I would like to start by discussing our key efforts in revamping our content strategy. As users suffer from information overload in the digitally charged world, we're convinced that the most effective way to add value to our users is to produce original content with distinctive characteristics that are true to our brand. Hence we have repositioned our content metrics and adjusted accounts and production pipelines to produce a series of columns and programs each written and presented in a certain voice and style consistent with our branding differentiation. Through these efforts, we intend to not only enhance our brand image but also create a unique brand affinity among our users and advertisers, which should help us unlock more certain long-term value from our brand equity in turn. To elaborate on the area of original content in order to cater to various user demand, we have focused our resources on producing three distinct venture genres: opinion columns, investigative reporting, and premium IP production. For example, during the second quarter, we launched our original opinion column titled 'Eye of the Storm', which is distinctively positioned to examine contentious current events. We present the audience with our unique authentic and timely information on issues by conducting meticulous research and deploying a wide array of viewpoints. Our coverage of various controversial topics and social phenomena generated an immense number of views across our ADP and other social platforms, with the most popular piece gathering nearly 140 million views on Weibo. As for in-depth investigative reporting, our trademark columns such as 'Tianbo' and the 'Human Intelligence Agency' continue to bring our users well-rounded and thorough analysis on challenging topics such as the COVID-19 Delta variant, the latest vaccine developments, and the Miami condo collapse. In addition, our social investigative column examines societal issues through the live stories of ordinary people, raising public awareness of these issues and giving voice to the unheard. Our new short video series titled 'Your Achievements' pioneers a unique storytelling method by combining field production with techniques reminiscent of 1980s celebrity speeches. The series portrays how others have overcome tremendous difficulties to accomplish nearly impossible projects. It resonated so much with the current audience's aspiration for excellence, success, and honor that it became an instant hit across the Internet. The two episodes released during the quarter accumulated over 10 million plays on our app alone. The second episode became the number one hot search on Bilibili and recorded the top feedback for similar streaming programs on iQIYI. 'Your Achievements' elevated our premium IP production content to new heights and exemplifies our industry-leading planning and production capabilities. In addition to quality production, advertisers also appreciate access to luminaries in our culture, science, and politics, with backgrounds and trade in sync with the brand images. For example, through the video series 'iFeng Talk', we interviewed Yue Minjun, our renowned contemporary Chinese artist. The program attained a large number of likes and endorsements from top KOLs as well as young intellectuals who constitute the large target demographics coveted by our advertisers. As for reporting news and events, we continue to distinguish ourselves through industry-leading breaking news coverage. During the quarter, we covered the launch of the Chinese manned spaceship through various formats, including live streaming, push notifications, and focal topic recommendations. Our multidimensional coverage reaped 5 million users following, particularly through live streaming, which attracted a historical record of over 800,000 live audiences. Beyond the cornerstone of our original content and news reporting, we also made strides in expanding our content ecosystem. In the quarter, we launched our own MCN platform called 'As We Know It'. It is positioned as a hub for knowledge-based content created by our contracted influencers. Taking into consideration our professional journalists' DNA, our global contact network, and a highly educated user base. By the end of the second quarter, our MCN had contracted with 14 subject experts including Phoenix TV reporters, renowned intellectuals, and overseas content creators. Our first original video series called 'Think Global Observer Group' brings news reports and live interviews on trending global topics and events to our audience. The series became an instant success on Weibo, Bilibili, and other third-party platforms, in addition to our own platform, obtaining a wide user following. In the meantime, we’re in the process of examining our creator mix to cover subjects such as law, economics, health and wellness, culture, and social science. Through our MCN platform, content creators benefit from our brand's resources, while we generate value by enhancing our content metrics, strengthening our brand equity, and providing clients with diversified marketing solutions. Looking ahead, we believe the combination of our cross-border content delivery capabilities with our distinctive creator mix, which consists of both banners in China and Chinese subtitles, will become a competitive advantage for us as we foresee an ever-growing demand for overseas marketing by Chinese brands. Next, I will briefly touch on signature events in the quarter. This year marks the 10th anniversary of our Phoenix Financial Summit. Prominent speakers including the Chief Executive of Hong Kong SAR, Ms. Carrie Lam, together with 31 other political dignitaries and business tycoons congregated at this year's summit. Also, for the iFeng gourmet food festival in Beijing and currently in Chengdu, we attracted over 160 distinguished guests at each location, including top chefs, food critics, restaurateurs, and celebrities, thus greatly enhancing our brand influence in the food sector. Now let's take a look at our iFeng app. In response to our realigned content strategy, we have implemented several initiatives to enhance the content ecosystem within our app. We carefully segregated content-related hot issues out of our premium content pool, thus setting time-sensitive content with temporary high views apart from evergreen content with sustainable popularity. On one hand, we continue to make editorial recommendations of trending topics to cater to user desires to tune into current events. On the other hand, we have also refined our premium content pool to retain in-depth content with large user value, including high-quality content from those original columns and programs mentioned earlier as well as from other media terms. By optimizing our operations and distribution of the premium content pool, we intend to increase both our user retention rate and average user ad spend on the app. In fact, our monthly repeat users increased by 4% sequentially over the last quarter. As we collaborate more closely with Phoenix TV on distribution rights, we have vastly improved our app's user interface and layout to better leverage the exclusive content from Phoenix TV. For example, we have segmented Phoenix TV-related content into a stand-alone column with its own landing page and ad content labels to highlight exclusivity. Because the Phoenix TV brand carries significant user trust, distributing exclusive content through the iFeng app significantly improved our user stickiness. During the second quarter, within the Phoenix TV column, monthly active users increased by 18%, while the click-through rate increased by 27% on a sequential basis. Lastly, I'd like to share our progress in revenue diversification. For online reading, we have made significant progress in adding more methods of monetizing our premium IP content. In addition to our cooperation with Ximalaya in audio content production, we have also entered into a long-term strategic cooperation agreement with Tencent Music Entertainment to expand our audio content licensing program to all of its platforms, including QQ, Kugou, and Kuwo Music. For our audiovisual content, we have formed a strategic cooperation with Shandong Film and Television Production Company, a renowned producer of movies and TV programs, to jointly create movies and TV shows based on our copyrighted IP concepts as well as to jointly engage investors and sponsors. For our real estate vertical, our performance in the first half of the year met our own expectations despite market regulation, which we believe will likely prevail throughout the rest of the year. In anticipation of a challenging environment going forward, we are proactively streamlining business operations at our local branch offices to boost revenue generation capabilities. We're also optimizing our revenue composition by gradually diversifying our client base to reduce customer concentrated risk. On the e-commerce front, our independently developed e-commerce platform was close to completion during the second quarter. We have invested substantial efforts in refining our merchandising strategy to establish our competitive differentiation in the e-commerce arena. After thorough reviews of our user base characteristics, our operating performance data, and third-party market research, we have concluded that our competitive edge lies in selecting and marketing products in two specialty categories: high culture and creativity, and health and wellness. Going forward, we will focus our platform resources on those two product categories. Moreover, we have decided to leverage external resources beyond our own user traffic to achieve faster growth for our e-commerce business. Our team is actively exploring different ways of utilizing our premium content to generate user traffic from third-party platforms such as WeChat. We'll also leverage our content production capabilities in various verticals such as Phoenix lab, food and beverage, health and wellness, culture, and reading to effectively close the loop of vertical content to specialty commerce. In summary, while we are fully aware of the multitude of challenges we are currently facing, we remain confident in our business prospects as we hone our core competency in original content creation, realigning our operational focus, expanding our content metrics, and adjusting our distribution strategies. With that, I will now turn the call to our CFO, 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 second quarter of 2021 were RMB 256.7 million, representing a decrease of 17.8% from RMB 312.3 million in the same period of last year. I will now provide some additional context on revenues during the second quarter of 2021. Net advertising revenues in the second quarter of 2021 were RMB 233 million, representing a decrease of 18.6% from RMB 286.3 million in the same period of last year, mainly due to reductions in the advertising spending of advertisers from certain industries. Paid services revenues in the second quarter of 2021 decreased by 8.8% to RMB 23.7 million from RMB 26 million in the same period of last year. Revenues from paid content in the second quarter of 2021 decreased by 32.4% to RMB 9.6 million from RMB 14.2 million in the same period of last year, mainly due to the trend towards free online reading in the online reading market. Revenues from e-commerce and others in the second quarter of 2021 increased by 19.5% to RMB 14.1 million from RMB 11.8 million in the same period of 2020, mainly driven by the increase in revenues from our e-commerce business. Loss from operations in the second quarter of 2021 was RMB 34.8 million, compared to income from operations of RMB 25.6 million in the same period of last year. Operating margin in the second quarter of 2021 was negative 13.5% compared to positive 8.2% in the same period of last year. As Shuang mentioned, we have made a strategic decision to increase our investment in bolstering our original content production capabilities. While such investment will impact our profit margin in the short term, as we're managing our expenses prudently, we believe that it will help boost our competitive advantage and revitalize our growth trajectory. Non-GAAP loss from operations in the second quarter of 2021 was RMB 30.1 million compared to non-GAAP income from operations of RMB 27.8 million in the same period of last year. Non-GAAP operating margin in the second quarter of 2021 was negative 11.7% compared to positive 8.9% in the same period of last year. Net loss from continuing operations attributable to iFeng in the second quarter of 2021 was RMB 7.1 million compared to net income from continuing operations attributable to iFeng of RMB 2.8 million in the same period of last year. Non-GAAP net loss from continuing operations attributable to iFeng in the second quarter of 2021 was RMB 2.1 million compared to non-GAAP net income from continuing operations attributable to iFeng of RMB 23.7 million in the same period of last year. Moving on to our balance sheet as of June 30, 2021, the company's cash, cash equivalents, term deposits, short-term investments, and restricted cash were RMB 1.61 billion, or approximately US$248.9 million. Finally, I'd like to provide our business outlook for the third quarter of 2021. We are forecasting total revenues to be between RMB 237.9 million and RMB 282.9 million. For net advertising revenues, we are forecasting between RMB 236.7 million and RMB 256.7 million. For paid service revenues, we are forecasting between RMB 21.3 million and RMB 26.2 million. Looking ahead, we will continue to prioritize the attraction and retention of users through the production of exclusive and original content. At the same time, we aim to execute more product upgrades to refine our user experiences and improve our content operations, which should ultimately fuel the growth of our brand equity. In line with this effort, we will also focus on bolstering our operating efficiency, investigating new monetization strategies, and improving our revenue stream mix. Such efforts will allow us to enter a new growth cycle and further improve our overall profitability. This concludes the prepared portion of our call. We are now ready for questions.

Operator, Operator

Thank you. Your first question comes from Xueru Zhang of 86Research. Please ask the question.

Xueru Zhang, Analyst

Good morning, management. Thank you for taking my question. I have one question regarding advertising; can management share more insight into the driver for advertisement growth in the second quarter? I just want to understand the growth trend and any major initiatives we should expect in the second half to further support that growth.

Edward Lu, CFO

Hello. This is Edward speaking. That is a very good question. Our brand advertising business is still facing challenges in revenue growth. During the quarter, advertisers in certain industries reduced their marketing spending. For example, clients in the auto industry, which is a major revenue source for our advertising business, have faced ongoing chipset shortages, lowering their production capacity and subsequently their sales targets, which prompted them to cut their ad spending. Advertisers in other industries, such as real estate, also trimmed their advertising activities due to the tightening regulatory environment. Additionally, during the second quarter, COVID-19 resurged in Southern China, causing some of our key offline operations and events in the region to be put on hold, negatively affecting our ad revenues. Nevertheless, short video and social media platforms keep gaining a more significant share of the online advertising market, contributing to intense competition. That said, we have carefully reviewed our business operations, reevaluated our sales team, and made operational adjustments to better prepare for the challenges ahead. We have assessed our industry and customer mix, as well as our original market dynamics, to explore more sales opportunities and develop new incentive schemes around business development to acquire new customers and enter new industries. Advertisers' demand for strategic branding and marketing is always evolving. They now require more comprehensive marketing solutions instead of just one ad product. Aside from our signature events and regular premium content offerings, we are also leveraging user traffic and influence on social media and short video platforms, including those generated by our influencers, to enrich our product and service offerings. As Shuang mentioned earlier, adjustments to our original content strategy are crucial as well. This will further enhance our brand. Coupled with our strategic planning in various industry verticals such as tourism, health and wellness, and automobiles, it should help improve user loyalty, increase brand influence, and ultimately drive the growth of our advertising business in these sectors. Lastly, utilizing our international business insights, we are actively launching official accounts on social platforms overseas such as Facebook and YouTube to further amplify our global brand presence and influence. At the same time, we are using our MCN platform to sign overseas KOLs with international backgrounds. I believe these efforts will create enormous value for large-scale corporations in China, helping them to expand their international exposure and conduct more overseas branding activities. Thank you, and I hope I have answered your question.

Xueru Zhang, Analyst

Yes. That’s very helpful. Thank you.

Operator, Operator

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

Carmen Zhang, Analyst

Hi, management. Thanks for taking my questions. First, can you please share some additional information regarding our operations on third-party social media and how do you plan to monetize from there?

Shuang Liu, CEO

Hi. Thank you, Carmen. This is Shuang. We’re definitely becoming more focused on third-party platforms. These platforms are increasingly important, as they can function as a channel for our premium content distribution. They are also a very important source of traffic and therefore monetization opportunities. In terms of brand advertising, traffic from these third-party platforms has provided existing advertisers with more opportunities to heighten brand exposure and reach potential consumers, further supporting our brand advertising revenue. Aside from brand influence, we also believe that the in-depth commercial value of this traffic has yet to be fully unleashed. They have helped us to access a large client base with growing demand for content marketing, especially in the FMCG industry. As more consumers begin shopping on social media platforms like WeChat, the large follower counts we've accumulated on these platforms will also drive growth in our e-commerce business. With this in mind, we have laid out a detailed action plan for our operations on social media platforms and have a specific aim to further explore their commercial value. First, we intend to concentrate our resources on developing top-tier accounts on third-party platforms and focus on quality over quantity. We have categorized our accounts on third-party platforms into different groups for varying purposes. For example, our iFeng accounts on Weibo, which cover broad content and have more than 20 million followers, will be used to fortify our brand influence rather than to directly drive monetization going forward. Conversely, our vertical content accounts, such as finance, economy, and fashion, along with our IP accounts and those of our MCN-contracted influencers, specifically target a more detailed audience base for monetization. Our focus on building content will differ from platform to platform to attract quality traffic and target followers, as characteristics between platforms vary greatly. For instance, WeChat has a large user base for finance and culture, while Bilibili focuses on tech and knowledge. These plans will work with streamlined operational processes and effective performance evaluations. We have established qualitative performance metrics such as content publishing numbers, article views, follower growth, and engagement across different platforms. By evaluating these metrics, we can assess whether we've met our operational targets. With a persistent focus on content quality and influence, along with our sales efforts, we believe our client base and average revenue per customer will both increase, allowing the commercial value of this traffic to naturally follow. Yes, this is my answer. Thank you.

Operator, Operator

I would now like to hand the conference back to Qing. Please continue.

Qing Liu, Moderator

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.