Phoenix New Media Limited (NYSE:FENG) Q1 2020 Earnings Conference Call May 11, 2020 9:00 PM ET

Company Participants

Qing Liu - Director, Investor Relations
Shuang Liu - Chief Executive Officer, Chairman of the Board of Yidian Zixun
Edward Lu - Chief Financial Officer

Conference Call Participants

Binbin Ding - JP Morgan
Frank Chen - Macquarie
Carmen Zhang - First Shanghai

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Phoenix New Media 2020 First Quarter 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. [Operator Instructions] Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your first speaker today, IR Senior Manager, Qing Liu. Thank you. Please proceed.

Qing Liu

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

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 sharpen our focus on enhancing our core competences, streamline our content operations, optimize our operating efficiencies and explore new business initiatives in a prudent and disciplined manner. Our efforts has 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, resulting growth.

First, on 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 enhance 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.

Out premium coverage of the coronavirus pandemic, combined with our diversified newsfeed 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 platforms 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 provide high quality – 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 channel 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 the greater social boot. In honor of our contribution to society, the State Information Center rank us among the top 10 online media outlets providing the most social value. This endorsement is a 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 invest vertical content to better inform the public. During the coronavirus operator, for example, our finance team produced a series of detailed reports depicting entrepreneurs' heroic battle to overcome the pandemic challenges. These PCs struck a chord throughout society generating more than 30 million views on social media and fostering widespread support in China.

It also produced a series report titled frontline changing jobs [ph], 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 provide 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 the social media. Moreover, in our fashion vertical we organized and campaigned featuring over 100 celebrity voice recording 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 comps 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 to 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 pulled out efficient user acquisition channels, we enhance existing user satisfaction and engagement and improve 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 ecommerce. 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 fulfill the marketing needs of our real estate clients by partnering with the top celebrity and Fujita, one of the largest scale real estate companies in China. The campaign became an instance 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 user who wish to attend highly sought after product launches, virtually through webcast, we created a new format for super product launch conference and upgraded the live podcast platform despite increased competition from video, our live streaming ecommerce platforms, our potent brand influence and meticulous product duration have heightened our platforms 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, an 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, with 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 parties these partnerships was 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 [indiscernible], despite the fact that real estate developers are becoming increasingly cautious about their advertising budgets in response to coronavirus outbreak. We're also collaborating with real estate developers to help them better generate high quality self-lease through their excess exploration of new marketing models, including offline to online live broadcast and more. Real estate developers continue to show interest in such initiatives in such innovation solutions. And we're optimistic about their growth potential.

In summary, we're currently taking challenges in advancing our advertising business and extending our base since the worldwide pandemic has caused severe disruption to the entire advertising industry. Nevertheless, in spite of these near-term happenings we aim to continue enhancing our content capabilities and content distribution purpose to further define our operating efficiency. The resiliency and strength of our proven business model as well as our compelling broad influence would also enable us to explore potential growth drivers in new fields in digital [ph]. 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 breadth 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

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 COVID-19 outbreak and the intensified industry competitions.

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 the 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 deposit, 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.

Question-and-Answer Session

Operator

Thank you, Edward. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from Binbin Ding from JP Morgan. Please ask your question.

Binbin Ding

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 advertiser industry such as FMCG, Internet services, et cetera, 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 advisers sentiment and feedbacks towards such a recovery? Are they generally remaining very cautious on the spending or are they actually planning to scale up their spending in the coming month? Thank you.

Shuang Liu

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 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 [indiscernible] 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 generates over 530 million views in total. So this epidemic actually boosts our brand influence and increased our user loyalties and laid on a solid foundation for our future user expansion and also to bring more advertising endorsements. Edward can – yeah, he'll have more –

Edward Lu

Good morning, Binbin. This is Edward speaking. In terms of the – our 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 like 48% year-over-year. However, we also observed a significant increase in ad spending from advertisers in the online – in areas such as online gaming and 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 belief as China continues to recover from the academic 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. And brand advertisers continue to assess the progression of the outbreak. In other words, like the brand advertisers, they're 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 the gaming industries essential. Second, we're leveraging our technology capabilities to transition offline events online. For example, the finance [ph] virtual summit we organized in May is a good example of this initiative. So we – in addition to fulfilling the branding needs of our clients, we 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 client. I hope I have answered your question Binbin.

Binbin Ding

It does. Thanks very much. Thank you.

Shuang Liu

Thank you.

Edward Lu

Thank you, Binbin.

Operator

Your next question comes from Frank Chen from Macquarie. Please ask your question.

Frank Chen

Good morning management. Thanks for taking my question. I have only one question on the cost side. I see you achieved impressive – you're highlighting 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

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 acquiring copyright contents from third party sources which not only led to an over 30% a year-over-year drop in our content cost, 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 in 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 cost in the first quarter. Well, the uncertainties caused by pandemic have created a serious of challenge for entire industry. We believe that effective corporate governance will allow us to continuously optimize our cost structures while ensuring ample cash flows and the 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.

Frank Chen

Thank you, Edward.

Edward Lu

Thank you, Frank.

Operator

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

Carmen Zhang

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

Shuang Liu

Thank you, Carmen. This is Shuang. You read the very good questions. First of all original IP content, particularly culture 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, so that should return home. And the Alliance of Heroes [indiscernible] have received widespread viewers' recognition and advertiser endorsements. In 2020, we will continue to deliver premium content, original content that complements our brand by leveraging the leading capabilities of our professionals, 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 do launch several blog posts 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 of foothold in the live streaming space with FENG Live.

The live streaming service has been vital in providing our user with real time coverage from large scale summits, and counter fears 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 last couple months, for example, FENG Live served as an essential online portal for users to follow 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, Mr. Steve Schwarzman [ph], Chairman of BlackRock Corp. Well the event once again, highlighted, our leading brand inputs for Live also became a benchmark of how live streaming service can be utilized to generate professional coverage of large scale events. In addition, we integrated ecommerce features into form 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 real estate's clients. And certainly, we fully recognize the immense potential short and medium, which is an integral part – 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 pet entertainment era, our extensive experience in video operations, our pervasive brands and our commitment to producing high quality aspiring and humanism 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.

Carmen Zhang

Thanks.

Operator

[Operator Instructions] I would like to hand it back to management. Please continue.

Qing Liu

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

Thank you.

Shuang Liu

Thank you all.

Edward Lu

Thank you.

Operator

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