Phoenix New Media Ltd (NYSE:FENG) Q3 2020 Earnings Conference Call November 16, 2020 8:00 PM ET

Company Participants

Qing Liu - IR Manager
Shuang Liu - CEO & Director
Edward Lu - CFO

Conference Call Participants

Binbin Ding - JPMorgan Chase & Co.
Carmen Zhang - First Shanghai Securities
Zhenyu Chen - Macquarie Research

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Phoenix New Media Third Quarter 2020 Earnings Call. [Operator Instructions].

I would now like to hand the conference over to your first speaker today, Qing Liu. Thank you. Please go ahead.

Qing Liu

Thank you, Operator. Welcome to Phoenix New Media's Third 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 third quarter 2020 financial results and webcast of this conference call are available on our website at ir.ifeng.com. A replay of the call will be available on the website in a few hours.

Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which apply 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

Thank you, Qing. Good morning, and good evening, everyone. Although we face a complex situation as a result of the COVID-19 pandemic and escalating geopolitical tensions, we delivered revenues in line with our previous guidance in the third quarter of 2020, generating RMB303 million in total revenue in the period. Furthermore, we remain steadfast in our commitment to providing a superior user experience, upgrading our products, maintaining our content leadership, augmenting our monetization capabilities and setting the stage for a return to growth.

First, in regards to our flagship news app, iFeng, we continue to enhance its user experience and improve its content delivery efficiencies through the optimization of its core capabilities. During the quarter, for example, we reaped the quality of viewing experiences for our users while also providing them with additional flash short-form content. Moreover, we were successful in introducing new public service functions to the platform, which helped to amplify both user engagement and user interaction, especially within the content of major social events and hot topics.

In addition to these key product upgrades, we also maintain our relentless efforts in fine-tuning our content recommendation engine. By integrating our seasoned editor knowledge into more areas of the company recommendation process, we were able to better focus on improvement of click-through rates and user time spent on the platform during the period. As such, our user business improved substantially in the quarter, with average time spent per user on platform increasing by 20% year-over-year, and our user retention rate grows by 41% year-over-year.

Meanwhile, our total number of newly added users also increased by 30% quarter-over-quarter as we continue to adopt a prudent approach in our user acquisition strategies and a focus on leveraging those acquisition channels with quality ROI.

Now turning to our content operations. In the third quarter, we remained focused on strengthening our leadership in those company verticals that we believe have long-term strategic values. In our financial vertical, for example, we further expanded our audience size by releasing such smash hits as On the Cover, our in-depth video series featuring exclusive interviews with influential people, including Mr. Long Yongtu, former Vice Minister of Foreign Trade and Economic Cooperations; and Ms. Maye Musk, celebrity model and mother of Elon Musk. In fact, On The Cover was so well received by our users that it has recorded more than 60 million total views on our own media portfolio during the quarter.

To further establish our story in the food vertical, we organized the 2020 ifeng food festival in Shanghai, Hangzhou and Guangzhou during the period. In line with these efforts, we also introduced a number of quality restaurants into our Golden Wutong Restaurant Guide which helped to better establish the guide as a go-to source for premium dining choices. Since its initial launch, the ifeng food festival has gone beyond merely providing our users with food-related content to penetrating China's entire food industry, gaining traction with famous chefs, reputable restaurants and common KOLs in the food space. As a result of the event's widespread success, it also continued to do well financially, once again demonstrating the monetization potential of our lifestyle verticals.

Additionally, during the quarter, we remained committed to fueling the growth momentum of our fashion vertical, organizing several online branding events for personal care and cosmetic products. The success of these branding events was mostly driven by our significant brand inflows, our large audience size. It was also due to our understanding of the new media lifestyle in China as we coordinated with 48 influencers in the cosmetic industries to organize effective promotional campaigns for the events. This combination of factors allow us to significantly expand the reach of our online branding events, further showcasing the power of our brand authority and influence on our target audience as well as the fashion industry as a whole.

Beyond our progress in expanding our vertical content leadership, we also made meaningful strides in the development of original IP programs. In the third quarter, for example, our launch of the fourth season of Wisdom People generated encouraging results with the first episode of the series immediately attracting more than 100 million total views to reach the top of trending lists for different social media platforms.

Another successful show, Jun Pin Tan, also continued to perform quite well during the period, enabling us to form strategic partnerships with both Jiangsu Satellite TV and Guizhou Satellite TV to broadcast the show. We believe that these type of deals are reputable and therefore demonstrate the significant monetization potential of our premium IP content going forward.

On innovation front, we maintain our focus on the cultivation of our existing initiatives while also capitalizing a number of other potential business opportunities.

In advertising, for example, we further accelerated the development of our ad platform Fengfei as part of these efforts with focus on upgrading those online traffic control and price building control functions capable of helping advertisers manage their acquisition costs with more precision. In addition, we also concentrated on enhancing Fengfei's data management platform to augment this external traffic identification capabilities, advertisement distribution efficiencies and monetization performance. As a result of our efforts, the total number of mobile applications that Fengfei has access to grew rapidly on a sequential basis in the quarter.

In regards to our real estate vertical, the outbreak of COVID-19 has resulted in significant disruptions throughout China's real estate market in 2020, causing developers to become increasingly reliant on both online house billings and online housing transactions to conduct their business. In recognition of the trend, we have partnered with real estate associations, government agencies and top developers to launch livestreaming sessions for property viewings. Beyond helping to facilitate property transactions more efficiently, this work also highlights our long-term plans to provide the real estate market with a one-stop real estate marketing solution.

Looking ahead, as the epidemic continues to be gradually brought under control in China, we expect the integration of online and off-line marketing channels to become the key for property developers to restore their business growth. In light of this growing demand, we plan to continue leveraging both online and off-line resources to further enhance our marketing solutions for the real estate vertical and thus better tailor these solutions to meet the needs of industry players in return.

Now please allow me to provide some additional color in regards to our key strategic focus for business development going forward. In terms of future investments, as we continue to evaluate potential investment opportunities, we'll also be sure to assess our existing capital structure and explore different ways of sharing the value we have created with our shareholders.

For strategic investments, we will focus on forging partnerships with the top VC funds in several different verticals, which not only has the potential to generate lasting returns but will also keep us up to date on the rapidly evolving market dynamics of new business factors. On organic growth front, we are maintaining our commitment to the continuous optimization of our product metrics with our flagship news app, iFeng, remaining at the core of our service offerings. Moreover, we will actively explore new opportunities through continuous product innovation while also experimenting with new monetization channels. As such, by focusing on these key strategic areas and executing as appropriate, we'll be able to capture market share at a larger scale and expand at a faster pace than previously possible, enabling us to capitalize on more worldwide opportunities over the long run.

In summary, in the third quarter, we maintained our strategic focus on optimizing our flagship news app, expanding our content verticals and fueling the growth of our monetization capabilities. Looking ahead, we expect the new media industry to continue facing pressure throughout the remainder of the year as a result of the current macroeconomic and geopolitical uncertainties. Nevertheless, our deep technical expertise, premium new content and potent brand inflows will enable us to remain at the forefront of China's new media industry, allowing us to capture those segments of the market with promising growth potential as the world rebounds from the COVID-19 pandemic.

Yes. With this, I would like to pass to our CFO, Edward Lu.

Edward Lu

Thank you, Liu Shuang, and thank you all for joining our conference call today. Our total revenue in the third quarter of 2020 were RMB303 million, in line with our previous guidance range and representing a decrease of 10.9% from RMB339.9 million in the same period of last year. This decrease was primarily due to negative impact of the COVID-19 outbreak and heightened industry competition.

I will now provide some additional color on our revenues during the third quarter of 2020. Net advertising revenues in the third quarter of 2020 were RMB281.3 million, representing a decrease of 10.2% from RMB313.1 million in the same period of last year. This decrease was primarily attributable to the previous stated reason. Paid services revenues in the third quarter of 2020 decreased by 19% to RMB21.7 million from RMB26.8 million in the same period of last year. Revenues from paid content in the third quarter of 2020 decreased by 34.3% to RMB8.9 million from RMB13.5 million in the same period of last year, which was mainly due to the tightening of rules and regulations for digital reading in China and in line with the broader market conditions.

Loss from operations in the third quarter of 2020 was RMB28.4 million compared to loss from operations of RMB60.2 million in the same period of last year. Operating margin in the third quarter of 2020 was negative 9.4% compared to negative 17.7% in the same period of last year.

Non-GAAP loss from operations in the third quarter of 2020 was RMB26.7 million compared to non-GAAP loss from operations of RMB56.8 million in the same period of last year. Non-GAAP operating margin in the third quarter of 2020 was negative 8.8% compared to negative 16.7% in the same period of last year. Net loss from continuing operations attributable to ifeng in the third quarter of 2020 was RMB0.9 million compared to net loss from continuing operations attributable to ifeng of RMB50.9 million in the same period of last year. Non-GAAP net income from continuing operations attributable to ifeng in the third quarter of 2020 was RMB1.3 million compared to non-GAAP net loss from continuing operations attributable to ifeng of RMB47.5 million in the same period last year.

Moving on to our balance sheet. As of September 30, 2020, the company's cash and cash equivalents, term deposits, short-term investments and restricted share -- restricted cash were RMB2.37 billion or approximately USD 349.5 million.

Finally, I'd like to provide our business outlook for the fourth quarter of 2020. We are forecasting total revenues to be between RMB332.4 million and RMB362.4 million, representing a decrease of 17% to 9.5% year-over-year. For net advertising revenues, we are forecasting between RMB309.6 million and RMB334.6 million, representing a decrease of 14.7% to 7.9% year-over-year. For paid service revenues, we are forecasting between RMB22.8 million and RMB27.8 million, representing a decrease of 38.8% to 25.4% year-over-year.

Looking ahead, we plan to continue focusing on our cost control measures while also remaining prudent in our investments, selecting only those opportunities that are in accordance with our long-term growth plans and capable of delivering a healthy ROI.

While we do expect that the new media industry will continue to face challenges over the short term, we also believe that the industry's long-term growth potential remains robust and that it also will continue to improve as China's economy gradually recovers. Moreover, we believe that our established brand influence, premium content offerings and cutting-edge technology will continue to position us at the forefront of China's new media industry going forward, enabling us to restart our growth engines as the industry bounces back from the disruption caused by COVID-19.

This concludes the prepared portion of our call. We are now ready for questions. Operator, please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from Binbin Ding from JPMorgan.

Binbin Ding

My question is on the ad market. So can you give us an update on the pricing market trend in the second half? It seems your ad revenue decline widened in the third quarter, and you still mentioned COVID-19 was still one of the major reasons. So can you elaborate on that? Also, can management talk about the advertising trend of industries? Which are the key categories you've seen some recovery and which industries still face a lot of challenges?

Edward Lu

This is Edward speaking. I will answer this question. Actually, in the third quarter, our advertising business was impacted by the recurrence of the epidemic in certain areas of China as well as the popularity of short-form videos and livestreaming e-commerce, which continued to gain market share during the quarter.

As you might know, our brand advertising and performance-based advertising accounted for about 80% and 20% of our total advertising revenues, respectively. Actually, in Q3, our brand advertising revenues increased on a sequential basis. This steady growth was mainly due to the gradual recovery of our off-line promotional campaigns and the original IP programs. As more off-line activities continue to take place in the remainder of 2020, we expect our brand advertising revenues to achieve double-digit growth in the fourth quarter.

However, on the other hand, our performance-based advertising continued to face challenge during the third quarter, mainly due to, I think, the following 2 factors. First, some of our clients are subject to stricter industry regulations, and therefore, they had to adopt a more conservative ad placement strategy. And secondly, the overall supply of the inventory in the market exceeded the market demand, which means raising the eCPMs of performance-based advertising more difficult.

By sector, the top 5 industries covered by our advertising business are auto, e-commerce, FMCG, financial services and Internet services. Those industries which have traditionally accounted for a substantial portion of our advertising revenues, including auto and Baidu, were mostly impacted in the first half of the year. However, as the pandemic gradually brought under control in the third quarter, both industries have since recovered significantly.

In regards to the auto market, the industry continued to show strong signs of recovery in the period. According to China Passenger Car Association, in September, retail sales of passenger cars increased by about 7.3% year-over-year. Wholesale sales of new energy passenger cars increased by more than 90% year-over-year. As such, we expect the auto sector to continue their recovery in the fourth quarter.

The online advertising industry has been underperforming due to the reverse of the epidemic in certain areas of China as well as this year's geopolitical issues. Short-form video and e-commerce were the only sources of advertising growth in this quarter, while the rest of the industry underperformed.

In recognition of the changing market dynamics, we have already established our presence in both the short-form video and e-commerce spaces. The majority of our original content is now produced in the short-form video format, and more than 80% of our brand advertising projects are now short-form video projects, which we are able to monetize through a combination of content production and advertising sales. We are confident that despite facing today's complex and volatile advertising market, our competitive advantage will enable us to continue propelling the growth of our business lines going forward.

I hope I have answered your question.

Operator

Our next question comes from Carmen Zhang from First Shanghai Securities.

Carmen Zhang

My name is Carmen. After you receive the second tranche of ADS payment, how do you plan to use the additional cash on the company's balance sheet? Are you considering price tabulation of dividends?

Shuang Liu

This is Shuang. Let me answer your question. As of September 30, 2020, we had cash and cash equivalents of USD 350 million. We also maintained our cash -- strong cash flow during the pandemic. It was driven by our effective cost control measures as well as the excellent return that we achieved in our ED investment. It showcased our strategic investment experience.

As for our existing capital, we plan to use these resources in 3 key areas. First, we'll continue to optimize our product metrics with our flagship news app, iFeng, remaining at the core of our service offerings. At the same time, we'll also aim to develop more platform-based products, which is capable of meeting the future needs of consumers. We will also explore new business opportunities with both government and enterprise business partners.

Secondly, we will actively explore more strategic investment opportunities by evaluating potential investments into those VC funds that are aligned with our business goals. In particular, we are focused on funds with extensive experience in TMT, entertainment, video, luxury consumer products and other vertical services. It will help to keep us up to grade -- up to date on the very rapidly evolving market dynamics of new business sectors.

Thirdly, we remain committed to creating shareholder value and delivering returns to our shareholders in a variety of ways. Having said that, dividends are simply one form of giving back to our shareholders that we will consider going forward.

This year, we have observed the privatization of some U.S.-listed companies as well as registration system reforms in the domestic capital market. We will certainly evaluate our choices in due course with our continuing focus on ensuring shareholder rights and maximizing their interest.

Right now, we'll also be sure to take over -- to take our own situation and market environment into account. In addition, we'll continue to work towards refining our core business and executing our new business initiatives. We're now taking active steps to expand our e-commerce business by upgrading our e-commerce products and building out our own supply chain to further improve the monetization capabilities of our e-commerce business. We hope to share our business progress on this front with everyone as soon as next quarter. I hope this answered your question, Carmen.

Operator

[Operator Instructions]. Your next question comes from Frank Chen from Macquarie.

Zhenyu Chen

A few questions. The first one is, I remember that you mentioned the company's target to narrow the loss, you mentioned, this year. I think you did quite a good job year-to-date. And when do we expect to break even looking forward? And the second question is on the advertising. Probably on the advertising side, unit price on brand ads, can you update us how KPM looks like today compared to last quarter or a year ago? And what direction do you think KPM will go in the future to drive up e-commerce?

Shuang Liu

Okay. Thanks. This is Shuang. I will answer the first part of the question. Maybe Edward can add a few more words on the advertising trends. Our operating loss for the first 9 months of 2020 was RMB73.8 million, which is much lower than our operating loss of RMB248 million in the same period of last year. As such, we are now on track to achieve our operating targets for the full year. However, due to the impact of the pandemic on our top line performance in 2020, we do not expect breakeven at operating level this year. As a public company, we fully understand the importance of profitability, and we are well aware that maintaining the healthy growth of our core business is the optimal path to long-term profitability.

With the continuous optimization of our current strategy and vertical operations, we are confident that we can leverage our existing business strength to not only ensure the growth of our core business but also develop additional growth drivers in such new areas as e-commerce, product reviews and original IP programs.

Over the long term, we believe that our effective corporate governance structure will enable us to strike the fine balance between growth and profitability. I think you mentioned the advertising trend going forward next year, right? So maybe Edward can add a few more words on this.

Edward Lu

This is Edward speaking. Actually, as I have previously mentioned in Binbin's question, looking forward, the advertising industry is still full of challenges. I think in like -- first, it depends on the development of the epidemic worldwide, especially in China, in -- we think next year, it's getting better, but it's still a question, right?

And so in this kind of macroeconomic environment, we think the online advertising industry are still facing challenges maybe in -- especially in the first half of 2020. And also, this online advertising industry is evolving, and users spend more and more time on platform like Douyin and Kuaishou, these kind of short-form video platforms.

So our advertising incomes are still facing pressures, especially for the -- how to make our advertising more cost-effective is a big challenge for us. And -- but we -- as I also mentioned before, actually, we have recognized this kind of changing in market dynamics. We already put a lot of effort and -- in like the short-form video and the e-commerce spaces. So next year, there will be challenges, but we also feel very excited and confident. We think we can handle these challenges and make some progress in advertising business. Thank you, Frank.

Operator

[Operator Instructions]. There are no further questions at this time. I would now like to hand the conference back to the management. Please continue.

Qing Liu

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.

Shuang Liu

Thank you all.

Edward Lu

Thank you.

Operator

Ladies and gentlemen, thank you for participating. You may all disconnect.