Earnings Call Transcript - FENG Q1 2020

Qing Liu, IR Senior Manager

Thank you, operator. Welcome to Phoenix New Media first 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 first quarter of 2020 financial results and webcast of this conference call are available on our website at ir.ifeng.com. A replay 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. Good morning and good evening, everyone. In the first quarter of 2020, the COVID-19 pandemic swept across the globe. As the leader of the new media industry in China, we took the resulting macroeconomic challenges head-on. We sharpened our focus on enhancing our core competencies, streamlined our content operations, optimized our operating efficiencies, and explored new business initiatives in a prudent and disciplined manner. Our efforts have resulted in enhanced user loyalty, no operating loss, and improved cash positions, thus setting the stage for us to capitalize on the post-pandemic economic recovery and resulting growth. First, on the content front, we continued to implement a number of new and innovative features in our flagship news app ifeng to further enhance user engagement. In the quarter, for example, we introduced short-form content and turning topics into ifeng's news feeds to allow users to effectively access information. We also further enhanced ifeng's user engagement by optimizing our audience voting feature and top comment summaries on the platform. These product advancements led to an increase in the diversification of the news feed consumption scenarios. Our premium coverage of the coronavirus pandemic, combined with our diversified news feed features, has helped to boost the appeal of our news feeds to users. Consequently, the number of users who opened ifeng push notifications increased by 117% year-over-year and 30% sequentially in the quarter. Moreover, by categorizing new content in terms of relevance and time sensitivity, we upgraded our content distribution system and further boosted our platform's capacity for major breaking news coverage. Such upgrades to ifeng have enabled us to further increase our user retention rate by 38% year-over-year. Besides upgrading our news app, we remain committed to providing high quality and differentiated content. Leveraging our team of leading media professionals, we produced a substantial amount of premium news coverage on the COVID-19 outbreak. For example, one article we produced about the struggle of an ordinary family in the face of the coronavirus epidemic received over 530 million views online. The report helped to secure crucial support for the family during their darkest hour. Overall, our focus on advocating for the lives of ordinary people in Wuhan during the outbreak successfully raised public awareness and channeled aid to more people in a timely manner. Such achievements, again, reflected our substantial coverage capabilities for major social events as well as our powerful media influence. Our information news content also received public recognition as a force for greater social good. In honor of our contribution to society, the State Information Center ranked us among the top 10 online media outlets providing the most social value. This endorsement is further evidence of our journalistic expertise, striking brand influence, and leading content capabilities. On the news coverage front, we work tirelessly to produce informative and investigative content to better inform the public. During the coronavirus outbreak, for example, our finance team produced a series of detailed reports depicting entrepreneurs' heroic battles to overcome the pandemic challenges. These reports struck a chord throughout society, generating more than 30 million views on social media and fostering widespread support in China. It also produced a report titled 'Frontline Changing Jobs,' which portrayed the heroic efforts of Chinese healthcare workers and ordinary people from all walks of life fighting against the pandemic on the frontline. The series also documented the real-life experiences of those overseas Chinese coping with the stress and uncertainties of stay-at-home orders and provided advice to the public about COVID-19 medical treatments. 'Frontline' achieved outstanding operating metrics with 16 of these articles collecting over 17 million views across social media. Moreover, in our fashion vertical, we organized a campaign featuring over 100 celebrity voice recordings to boost public morale, accumulating more than 40 million views and 60,000 interactions on social media in the face of the coronavirus epidemic. Against the backdrop of unprecedented macro uncertainties and market challenges, our ability to control our costs and preserve an ample cash reserve has become essential to the long-term goals of our company. Consequently, we have made a number of proactive adjustments to bolster our operating performances. We have refocused our current growth strategy on the reduction of user churn rate and improvement of user retention rate. We're also actively avoiding inefficient user acquisition methods, as we firmly believe that such tactics will jeopardize our user base quality and monetization efficiency. Despite a reduction in our marketing expenditures, as well as pulling out inefficient user acquisition channels, we have enhanced existing user satisfaction and engagement and improved new user attraction by leveraging our high-quality content and premium user experiences. As the epidemic accelerates the migration for commerce from offline to online and shifts internet marketing closer to the point of transaction, we have made a decisive push to capitalize on emerging growth opportunities in e-commerce. In the real estate vertical, for example, we launched our innovative shopper payment marketing campaign. This creative model integrated property sales into celebrity live streaming concepts, which successfully fulfilled the marketing needs of our real estate clients by partnering with top celebrity and Fujita, one of the largest scale real estate companies in China. The campaign became an instant smash hit, attracting over 10 million viewers to our platform and approximately 20 million across the internet. Additionally, in the first quarter, to cater to the increasing number of users who wish to attend highly sought-after product launches virtually through webcast, we created a new format for super product launch conferences and upgraded the live podcast platform. Despite increased competition from video, our live streaming e-commerce platforms, our potent brand influence and meticulous product curation have heightened our platform's competitive advantages in the marketplace. Competing the final link in the transaction value chain for advertisers, our platforms have unleashed the power of our closed-loop marketing system. For our new business initiatives, we continue to make valid progress in the modernization of our comic book and online real estate business in the first quarter. On the comic book front, our highly acclaimed series 'Love Junkie' and 'A Deal is A Deal' maintained their outstanding performances, cracking 124 million and 108 million online views by the end of this quarter respectively. Furthermore, we have formed four strategic partnerships with international publishers to export two of our own popular comic book series into the Korean market. In addition to being a win-win deal for the parties, these partnerships served as experience for us as we continue to explore more IP initiatives in the comic book industry going forward. Notably, for online real estate, we have further improved the profitability of this business segment through effective project management and content optimization, despite the fact that real estate developers are becoming increasingly cautious about their advertising budgets in response to the coronavirus outbreak. We're also collaborating with real estate developers to help them better generate high-quality self-leads through their excessive exploration of new marketing models, including offline to online live broadcasting and more. Real estate developers continue to show interest in such innovative solutions, and we're optimistic about their growth potential. In summary, we are currently facing challenges in advancing our advertising business and extending our base since the worldwide pandemic has caused severe disruptions to the entire advertising industry. Nevertheless, in spite of these near-term happenings, we aim to continue enhancing our content capabilities and content distribution purposes to further define our operating efficiency. The resiliency and strength of our proven business model, as well as our compelling brand influence, will also enable us to explore potential growth drivers in new fields in digital media. In light of the current market environment, we expect the epidemic to impact our business segments in the short term. However, our consistent delivery of premium new content and elevated brand influence will help us mitigate these challenges and minimize our exposure to the increasing macro uncertainties. With that, I'll turn the call to Edward, our CFO, to go through the financial results.

Edward Lu, CFO

Thank you, Shuang. And thank you all for joining our conference call today. Our total revenues in the first quarter of 2020 were RMB274.8 million, which beat the high end of our previous guidance and represent a slight decrease of 3.5% from RMB284.9 million in the same period of last year. Total revenues in the quarter included RMB59.5 million of consolidated revenues from Tianbo. Excluding the revenue contribution from Tianbo, total revenues in the first quarter of 2020 decreased by 24.4% year-over-year due to the negative impact of the COVID-19 outbreak and intensified industry competition. I will now provide some additional color on our revenues in the first quarter of 2020. Consolidated net advertising revenues in the first quarter of 2020 were RMB227.9 million, representing an increase of 5.5% from RMB216 million in the same period of last year. This increase was primarily attributable to the consolidation of advertising revenues from Tianbo. Excluding the revenue contribution from Tianbo, net other housing revenues in the first quarter of 2020 decreased by 20.9% year-over-year. Paid services revenues in the first quarter of 2020 decreased by 31.9% to RMB46.9 million from RMB68.9 million in the same period of last year. Revenues from paid content in the first quarter of 2020 decreased by 32% to RMB36 million from RMB52.9 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. Loss from operations in the first quarter of 2020 was RMB116 million, compared to RMB122.1 million in the same period of last year. Operating margin in the first quarter of 2020 was negative 42.2%, compared to negative 42.9% in the same period of last year. Non-GAAP loss from operations in the first quarter of 2020 was RMB71.7 million, compared to RMB118.1 million in the same period of last year. Non-GAAP operating margin in the first quarter of 2020 was negative 26.1%, compared to negative 41.5% in the same period of last year. Net loss attributable to Phoenix New Media Limited in the first quarter of 2020 was RMB79.5 million, compared to RMB119.7 million in the same period of last year. Non-GAAP net loss attributable to Phoenix New Media Limited in the first quarter of 2020 was RMB49.7 million, compared to RMB111.8 million in the same period of last year. Moving on to our balance sheet, as of March 31, 2020, the company's cash and cash equivalents, term deposits, short-term investments, and restricted cash were RMB1.48 billion, or approximately US $209.5 million. Finally, I'd like to provide our business outlook for the second quarter of 2020. We're forecasting total revenues to be between RMB308.7 million and RMB338.7 million, representing a decrease of 14.3% to 21.9% year-over-year. For net advertising revenue, we are forecasting between RMB276.4 million and RMB291.4 million, representing a difference of 10.3% to 14.9% year-over-year. For paid service revenues, we are forecasting between RMB72.3 million and RMB47.3 million, representing a decrease of 32.8% to 54.1% year-over-year. As we walk through the impact of the pandemic, our long-term strategy of maintaining a strong balance sheet with no debt, and ample liquidity continues to serve as a significant advantage. Beyond our current reserve of cash, which is quite healthy, we also expect to receive the second tranche of our Yidian transaction payment. This cash injection will allow us to tap into new growth opportunities in attractive markets and industry verticals. At the same time, we also plan to maintain our focus on the refinements of our cost structures to further bolster our operating efficiency. Therefore, we're successfully reducing traffic acquisition costs in the quarter by almost 50% on a year-over-year basis. Moving forward, the combination of our stringent cost control measures and healthy cash position will enable us to overcome the challenges in the current market environment, seek the opportunity to develop during the post-pandemic economic recovery, and consolidate our leadership in China's new media industry for years to come. This concludes the prepared portion of our call. We are now ready for questions. Operator, please go ahead.

Binbin Ding, Analyst

Good morning management. Thanks for taking my question. My first question is regarding the COVID-19 impact. So can management share some color regarding the impact on the overall online advertising sector and your own business performance? And if possible, could you elaborate some details on the impact by major advertising industry such as FMCG, Internet services, etc., as well as the impact on brand ads versus performance ads? My second question is, it seems the situation is largely under control and economic activity is gradually back to normal since April. So how does advertisers' sentiment and feedback towards such a recovery? Are they generally remaining very cautious on spending, or are they actually planning to scale up their spending in the coming months? Thank you.

Shuang Liu, CEO

Yeah. Thank you, Binbin. This is Shuang. I'll answer the first part to address your concern about the impact on the business and Edward will take on the advertising and performance ad and also the industry segments. During the outbreak, I think, looking back, our editorial team performed very well. Thanks to the efforts, we have achieved significant improvement in the operating metrics of our news app as the number of users opening ifeng push notifications increased by, as I mentioned in my opening remarks, probably by 117% year-over-year, and user retention rate grew by 38% year-over-year. Even though the epidemic put our operating capability to test, our content production team outperformed expectations. During the quarter, our team created a series of high-quality original content programs that resonated with a broad demographic online, such as Human Intelligence Agency and our popular We-media account for living at least successfully captured the hearts and the minds of the public with the top reports, importantly generating over 530 million views in total. So this epidemic actually boosted our brand influence and increased our user loyalty, and laid a solid foundation for our future user expansion and also to bring more advertising endorsements. Edward can – yeah, he'll have more to add.

Edward Lu, CFO

Good morning, Binbin. This is Edward speaking. In terms of the advertising industry, I think it's still under severe pressure. However, it has started to recover in the second quarter. From an industry perspective, advertisers in the liquor and auto sectors, among others, are negatively impacted in China. So, based on data from the China Association of Automobile Manufacturers, like car sales in March dropped by around 48% year-over-year. However, we also observed a significant increase in ad spending from advertisers in areas such as online gaming and the education industry. We're organizing these trends. We'll continue our investments to acquire new advertising clients in various industries to build a more diverse client base. We believe as China continues to recover from the pandemic, brand advertising and performance-based advertising will also recover. On a sequential basis, we believe brand advertising will recover faster because SMEs will face a bigger battle for survival. Brand advertisers continue to assess the progression of the outbreak. In other words, brand advertisers are still cautious in Q2. We are actively developing new strategies to adapt to the online advertising industry in the post-pandemic period. Firstly, as I mentioned earlier, we will optimize our sales team to focus our efforts on acquiring advertising clients in the online education and gaming industries. Secondly, we're leveraging our technology capabilities to transition offline events online. For example, the virtual finance summit we organized in May is a good example of this initiative. So we, in addition to fulfilling the branding needs of our clients, need to help our clients articulate their value propositions and enable them to sell their products at a premium. The marketing campaign that our real estate channel executed in April is an excellent example of how we utilize our live streaming service to facilitate online conversions for our clients. I hope I have answered your question, Binbin.

Frank Chen, Analyst

Good morning management. Thanks for taking my question. I have only one question on the cost side. I see you highlighted impressive achievement on cost control in the first quarter. Could management you elaborate more on the results and on the measures – on the cost control measures in the first quarter and given the uncertainty caused by the COVID-19, has the company changed the full year operating targets? That's my question.

Edward Lu, CFO

Hello, Frank. This is Edward speaking. Actually, during the quarter, the successful implementation of our cost control initiatives allowed us to reduce our cost by about 30% year-over-year. The reduction is a testament of our efforts in a few areas. First, we are increasingly selective in acquiring copyright content from third-party sources, which not only led to over a 30% year-over-year drop in our content costs, but also improved our content quality. Secondly, we started optimizing our organizational structure at the end of last year. The optimization enabled us to improve our operating efficiency while executing our growth plans. As a result, we reduced the staff costs of ifeng in the first quarter by 19% year-over-year. Certainly, we adopted a more prudent and systematic approach in our user acquisition management process, which enabled us to cut about half of our acquisition costs in the first quarter. Well, the uncertainties caused by the pandemic have created a series of challenges for the entire industry. We believe that effective corporate governance will allow us to continuously optimize our cost structures while ensuring ample cash flows and healthy revenue growth. Our target for 2020 is to drastically reduce our losses, and our ultimate goal will always be securing the long-term growth prospects of our company and delivering sustained value to our shareholders.

Carmen Zhang, Analyst

Hi, management. Thanks for taking my question. Could you share more on the company's video development strategy? How do you plan to respond to the rapid growth of short-form video and live streaming players?

Shuang Liu, CEO

Thank you, Carmen. This is Shuang. You raised a very good question. First of all, original IP content, particularly cultural interviews, has always been the cornerstone of our company. Many of our in-house productions, such as Endless Power, Holy Weekend, so they're wisdom lectures, have received widespread recognition from viewers and advertiser endorsements. In 2020, we will continue to deliver premium original content that complements our brand by leveraging the leading capabilities of our professionals and IP content production team. The outbreak of COVID-19 in the first quarter of 2020 has delayed some of our content production arrangements, but we did launch several blog post series that were very well received by both our users and advertisers. And that's about our original IP company. The second part, we have long established a foothold in the live streaming space with FENG Live. The live streaming service has been vital in providing our users with real-time coverage from large-scale summits and counterfeits in the past. Building on its previous success, we have continued to upgrade FENG Live, enabling it to play a significant role in keeping our users informed throughout the pandemic. In the last couple of months, for example, FENG Live served as an essential online portal for users to follow the finance virtual summit that we organized in May. In the summit, we invited many distinguished speakers to share insights on the global economy, including Mr. Cui Tiankai, the Chinese ambassador to the United States, and Mr. Steve Schwarzman, Chairman of BlackRock Corp. The event once again highlighted our leading brand input for Live and also became a benchmark of how live streaming services can be utilized to generate professional coverage of large-scale events. In addition, we integrated e-commerce features into the FENG Live platform, complementing the migration process in April. We launched a celebrity property-filled live streaming campaign in our real estate channel. The campaign delivered encouraging results, generating better than expected sales for our real estate clients. Certainly, we fully recognize the immense potential of short and medium-length videos, which are integral components of our growth strategies. Leveraging short-form videos on news coverage will be more engaging and relevant to our viewers. Right now, we're also actively exploring distribution channels for original short-form video content across the internet. This content is more appealing to younger users. We believe that short-form video will perfectly complement our existing library and further enhance our user experience. So in the content entertainment era, our extensive experience in video operations, our pervasive brand, and our commitment to producing high-quality, inspiring, and humanistic IP content will set us apart from the competition. Going forward, we'll definitely continue to upgrade FENG Live and explore additional monetization opportunities on its platform. Yeah, this is all overall the video game plan. Thank you, Carmen.

Qing Liu, IR Senior Manager

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

Edward Lu, CFO

Thank you.

Shuang Liu, CEO

Thank you all.

Edward Lu, CFO

Thank you.

Operator, Operator

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