Phoenix New Media Ltd (NYSE:FENG) Q1 2019 Results Earnings Conference Call May 13, 2019 9:00 PM ET

Company Participants

Qing Liu - IR
Shuang Liu - CEO and Director
Betty Ho - CFO and Director

Conference Call Participants

Frank Chen - Macquarie
Binbin Ding - JPMorgan Chase & Co.

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Phoenix New Media 2019 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Tuesday, 14th of May 2019.

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. Thank you and welcome to Phoenix New Media's first quarter 2019 earnings conference call. I'm joined here by our Chief Executive Officer, Mr. Shuang Liu; and Chief Financial Officer, Ms. Betty Ho.

On today's agenda management will provide us with a review on the quarter and also include a Q&A session after the management's prepared remarks. The first quarter 2019 financial results and webcast of this conference call are available at ir.ifeng.com. A replay of the call will be available on the website in a few hours.

Before we continue, I 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. I'm pleased to see a solid start in 2019. Our first quarter total revenues reached RMB287.3 million, (sic) [RMB284.9 million], exceeding the high end of our previous guidance. This outstanding performance was the result of new growth initiatives in our content offering strategy, digital reading, and the expansion in the lifestyle-related verticals.

We have optimized our flagship product, the ifeng app substantially. We continue to focus on enhancing our AI footprint by further improving the synergies with our editorial system.

Our substantial integration of human expertise and AI algorithms has helped us to improve our ability to generate and distribute high quality, unbiased coverage of major events and [Indiscernible].

It also helps to improve our new delivery efficiency. For example, our coverage of the two sessions in March once again demonstrated our preeminence in the field of upcoming major events.

During our coverage of the two sessions, we fully utilized the advantages of artificial intelligence and our editorial expertise to produce and to distribute hundreds of editorial articles and videos based on our exclusive interviews with influential leaders, all of which were well received by our users.

We believe that consumers read news for three reasons; to obtain information, to fulfill interests and to be entertained. The Good News app should satisfy all three requirements and strike a healthy balance at the same time.

The sad reality is that nowadays there are many news apps that only focus on monetary returns and chase after users' time using click-bait content [Indiscernible]. Such practice leads to addictive consumption of worthless and incomparable information. In fact, these practices are also detrimental to new adept user retention rate and the commercial interest.

Accordingly, we have decided to uphold our professional and moral standards. Furthermore, we continue to carry out our mission of providing truthful, objective, and a balanced news coverage for users.

In addition to providing high-quality coverage of major events and breaking news, we have also strengthened our operating efficiencies in the production of downtime-sensitive premium content. This has been accomplished by combining our AI framework data processing power with our editorial team's ability to skillfully curate materials. In fact, we produce and distribute downtime-sensitive premium content more effectively than ever before, which is evidenced by the increasing time spent from our users.

More specifically, the average time spent on our news app during the first quarter increased by 15.4% sequentially. Furthermore, the retention of new users on our app increased by 15.9% sequentially in the first quarter, again demonstrating the attractiveness of our news content and effectiveness of our content distribution system.

Similar to these operational improvements, we also expanded our We-media operations during the quarter with a particular focus on our top performing We-media accounts. As a result, the number of our top performing We-media accounts increased by 25% to 25.2% sequentially in the first quarter.

In terms of our IP strategy, the initial session of our original series, Super Tongue, aired in the first quarter and was a smash hit. The 12-episode show recorded over 1 billion total views online and registered over 600 million interactions on social media.

Another example of a successful IP creation is the second season of A Journey Through Literature. In the first quarter, this show was viewed over 5 million times and praised as the Most Artistic Culture Show by the People's Daily and others in the Chinese media industry.

In addition, we have a powerful pipeline of new additional IP content, including [Indiscernible] and others, which have the potential to engage a large audience and pick up a reacceleration in advertising costs. The social and economic success of proprietary content has once again demonstrated our industry-leading content production capabilities.

Going forward, we will remain committed to giving competitive IP and providing premium content to our users. We believe both will further enhance our brand image, differentiate us from our peers, and help us expand our user and client base.

Now, let's move on to the recent developments of our new growth drivers. I'll first discuss the purpose on digital reading business. In March 2019, we acquired the majority equity interest in Beijing Yitian Xindong Network Technology. This company operates the leading online reading mobile app, Tadu. Following this strategic announcement, we utilized Tadu's strong technology development and distribution capability to significantly enhance our digital reading business.

In the first quarter of 2019, Tadu launched a free-for-read model. This model is very successful as demonstrated by increased of the average user time spent and diversification of revenue streams for our digital reading applications.

Meanwhile, for the development of ecosystem of IP from Fanyue, we added more audiobooks to our library, increasing our total audiobooks coverage to more than 13,000 hours in the first quarter of 2019.

Our comic books also performed very well. Our hit comic series, [Indiscernible], achieved 400 million and 540 million views in the first quarter, respectively. We believe Fanyue and Tadu will continue to work together to create a superior online reading experience and help to secure our digital reading business as a long-term driver of growth.

Lastly, I will discuss our mobile games expansion efforts. Our entertainment subsidiary, [Indiscernible], has developed animated movies and video games based on content from Adventures in the Skies, a story of martial arts originally developed by Phoenix New Media. While the animated series will not be available until the end of this year, its first promo video was an instant success on popular reader sharing platform in China.

At the same time, [Indiscernible] is also actively developing games for smartphones, PCs, and other game consoles based on storylines in Adventure in the Skies. We are now working closely with some of the most highly regarded game operators in China and plan to launch our games in late 2019.

We not only expect Adventure in the Skies to become one of the most celebrated titles in China, but also plan to use it as a roadmap for the creation of future content IP. In regards to Yidian, we are very close to the due date for fulfilling certain closing conditions and expect to complete the transaction by June 2019.

Yidian has proven to be one of the most successful investments made in the past several years and we are pleased to share investment proceeds from the sale of Yidian with our loyal and supportive shareholders.

Having said this, we are still in the midst of a business transformation and have yet to return to profitability. In addition, while the Yidian transaction has provided a handsome return, it also meant that we relinquished an integral piece of our newsfeed and algorithm development strategy.

As a result, we need to employ additional investment opportunities that are capable of contributing to organic business growth. Therefore, as we consider a dividend plan, we are also trying to strike a balance between rewarding shareholders and ensuring that we have sufficient working capital to fuel future business investments.

In fact, only a handful companies with ample cash reserve in the Chinese Internet space have paid dividends. Consequently, we have preliminary planned to use the proceeds as follows; 15% to 25% for potential special dividend payment; 25% to 35% for investment in content verticals, accelerating our organic growth and the general working capital; and 40% to 60% for strategic investments.

This proposed use of proceeds is still subject to a final approval from our Board of Directors. We remain prudent in selecting strategic investment opportunities. We are only willing to consider those investment targets closely aligned with our funding principles, business philosophies, brand image, and target [Indiscernible].

As more and more companies reevaluate their traditional marketing strategies in the face of macroeconomic headwinds and industry challenges, our ability to generate an accurate and highly relevant sales leads in a variety of niche verticals have made us an ideal partner for many business and advertisers.

In short, it can help achieve a high ROI with a limited marketing budget. Going forward, we believe that we are well-positioned to continue enjoying the benefits of leadership away from the traditional content IP model.

We strive to enhance our competitive advantage through the professional editing of content, timely coverage of newsworthy topics, and efficient dissemination of information. We seek to differentiate ourselves by seamlessly integrating technology, algorithm, and professional judgment, while relentlessly advancing our core competence.

We are also actively exploring new innovative ways to monetize our original and proprietary content. We are revitalizing growth through strategic investments in new initiatives, including digital reading and verticals. We are confident that by augmenting our leadership in the new media industry, we will eventually become one of the leading news app in China.

With that, I will turn the call over to our CFO, Betty Ho for final update on the quarter.

Betty Ho

Thank you, Shuang and thank you all for joining our conference call today. Now, let me take you through the financial highlights for the first quarter of 2019. The amounts mentioned here are all in RMB unless otherwise noted. The differences between GAAP and non-GAAP consist of share-based compensation and income or loss from equity method investments net of impairments.

ifeng's total revenue for the first quarter of 2019 were RMB284.9 million, which beat the high end of our previous guidance and were flat as compared with the same quarter last year. Non-GAAP attributable to Phoenix New Media Limited for the first quarter of 2019 was RMB111.8 million. Non-GAAP net loss per diluted ADS in the first quarter of 2019 was RMB1.54.

Firstly, on revenue, I will provide details on our revenues for the first quarter of 2019. Net advertising revenue for the first quarter of 2019 decreased by 11.3% to RMB216 million from RMB243.4 million in the same period last year, mainly attributable to a 9% year-over-year decrease in PC advertising revenue and a 12.4% decrease in mobile advertising revenue. This decrease was mainly due to macroeconomic headwinds and intense competition.

Paid services revenue for the first quarter of 2019 increased by 66.1% to RMB68.9 million. Revenues from paid content for the first quarter of 2019 increased 147.8% to RMB52.9 million from RMB21.4 million in the same period last year, mainly due to the inclusion of digital reading revenues from Tadu.

Revenues from games for the first quarter of 2019 were RMB3.1 million, representing a decrease of 35%. Revenues from MVAS for the first quarter of 2019 were RMB7.9 million, representing a decrease of 42%.

Revenues from others for the first quarter of 2019 were RMB5 million, representing an increase of 200.8%. It was mainly caused by the increase in revenues from commissions generated from online transactions.

Non-GAAP gross profit for the first quarter of 2019 was RMB108.2 million compared with RMB156.4 million in the same period last year. Non-GAAP gross margin for the first quarter was -- of 2019 was 38% compared with 55% in the same period last year.

Non-GAAP content and operational cost as a percentage of total revenue was 51.1% as compared to 37.1% in the same period last year. It was mainly due to an increase in IP production cost.

Revenue sharing fees as a percentage of total revenue was 6.1%, as compared to 3% in the same period last year. Bandwidth cost as a percentage of revenue was 4.9% as compared to 5% in the same period last year. Non-GAAP operating expenses for the first quarter of 2019 were RMB226.3 million as compared to RMB210.8 million.

Non-GAAP operating loss was RMB118.1 million as compared to RMB54.4 million in the same period last year. Non-GAAP operating margin for the first quarter was negative 41.5% as compared to negative 19.1% in the same period last year.

Net loss attributable to ifeng for the first quarter of 2019 was RMB119.7 million as compared to net loss of RMB57.5 million in the same period last year. Non-GAAP net loss attributable to ifeng for the first quarter was RMB111.8 million as compared to RMB51.7 million in the same period last year. Non-GAAP net loss per diluted ADS for the first quarter was RMB1.55 as compared to RMB0.71 in the same period last year.

Now, I will discuss our balance sheet. As of March 31st, 2019, the company's cash and cash equivalents, term deposits, short-term investments, and restricted cash were RMB1.75 billion or approximately $260.3 million.

Restricted cash represents deposits placed at security for banking facilities relative to the company and are restricted in their withdrawal or usage. The increase of cash balance was due to the receipt of the $100 million deposit from the sale of Particle Inc.

Finally, I would like to provide our business outlook for the second quarter of 2019. We are forecasting total revenues to be between RMB374.1 million and RMB394.1 million, representing an increase of 2.8% to 8.3% year-over-year.

For net advertising revenue, we are forecasting between RMB308.8 million and RMB323.8 million, representing a decrease of 2.7% to an increase of 2% year-over-year. For paid service revenue, we are forecasting between RMB65.3 million and RMB70.3 million, representing an increase of 40.3% to 51%.

This outlook is made in the face of near-term headwinds and a macroeconomic slowdown in China that we expect to persist for some time. In light of the greater market conditions, we are taking measures to actively combat these challenges.

In addition to that, we are anticipating continuous investment amidst this transformation period. Our initiatives include expanding our own IP production to cultivate a full IP ecosystem, strengthen on our original content production, and enlarging our content library by investing on We-media.

We are confident that our investment and focus on these initiatives will allow us to enter into a fresh growth cycle. Accordingly, we expect our total revenue for the year of 2019 remain unchanged to increase by over 20%.

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, Betty. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]

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

Frank Chen

Good morning Shuang, Betty, and Liu Qing. This is Frank from Macquarie. Thank you for taking my question. I basically have two questions. One is on your traditional core advertising business. We experienced an 11% year-over-year declining ad revenue in the first quarter, while the second quarter guidance suggest a relatively flattish advertising revenue. Could you share more about what's the driver behind the recovery of our advertising business given the still very weak macro condition in China?

The second question is on your new initiatives. Could you share more details on the development of your new initiatives, including digital reading and maybe online games, mobile games?

For the digital reading, could you share more operating data with us, including the DAU trends, time spent trend, and how many writers do we have? And how do we sign contracts with those writers?

And for paid online reading, could you share with us how -- what -- share with us what ARPU looks like for now? And for the new launched free online -- free reading model, could you share some outlook on the potential ad revenue per DAU?

And for the online gaming business, it's only contributes a very small portion of our revenue for now. Could you share with us what's the potential in this business? And when should we expect a meaningful revenue contribution from our gaming business? That's all of my questions. Thank you.

Betty Ho

Thank you, Frank. That was a very long question. I'll take the first two questions and, if there's anything to add, Shuang will add. So, for your first question regarding the traditional advertising business, we are actually experiencing a transformation period in the coming two years.

In terms of advertising, we are seeing the advertisers have cut their budget since Q4 last year and it's prolonging to this year due to macroeconomic headwinds. Our DSP advertising income is decreasing this quarter -- or has been decreased this quarter due to the intense competition among the advertising based on performances. Those advertisers' budgets are always going to big players that's why the competition is becoming very fierce.

As a result, we need to strengthen our brand advertising by investing more on innovative advertising solutions, on providing more relevant events, original video content and IP creation, et cetera.

We are also diversifying our revenue streams to traditional bases like online literature, e-commerce, et cetera. We have laid a very good foundation for our brand advertising to continue to grow.

When we adopted the IP strategy last year, as you may -- as you have heard on the script for Shuang, that the three IPs that we have launched last year were very successful. We are seeing that our brand advertising revenue actually has been increased by 7% this quarter.

We will be adding more IP and/or original production this year and we expect that revenue generated from these IPs will be growing at least 300% as compared with 2018. So, this is for the advertising income part.

And for your second question regarding the digital reading and mobile games, as for digital reading, I'm sorry that we are not providing the operating metrics at this moment because -- for competitive reasons.

At the end of last year, we completed the acquisition of Tadu. And we made this acquisition because we believe that Tadu's technological capabilities and content resources is greatly complementary to ours.

Our goal is to establish a complete digital reading IP ecosystem, which leverages our diverse library of intellectual property and to monetize it through a full range of IP products. For example, like audiobooks, movies, series, comic and games, et cetera. To achieve this, we are actively expanding our content library and enhancing our technological capabilities.

By adding Tadu, it will create synergies on our content acquisition and product diversification. Tadu actually launched a free reading model early this year and it was proven to be very successful. That's why we have a better than expected result of Tadu during first quarter this year.

As far our gaming business, it has been ongoing for three years already. Actually, we have launched [Indiscernible] about three years ago as our game division. This -- [Indiscernible] is aimed to provide original and premium entertainment content with an emphasis on traditional Chinese culture. The founder of [Indiscernible] -- he's known as [Indiscernible], he is a vendor and game developer with a proven record of accomplishments. His previous productions, including Chinese Paladin, [Indiscernible], and Sword of Legends, [Indiscernible], these are all very well-received by gamers in China.

[Indiscernible] has been developing Adventures in the Skies for it to be the full IP operations originated by Phoenix New Media. It will be -- the novel version has been published after three years of development. Animated movies and video games are underway.

In terms of games, [Indiscernible] has already initiated beta testing for its RPG version, which received very positive feedbacks from our beta testers. We are confident that these efforts will ultimately earn us the prestige of a top IP developer and operator in China. So, that's all our response to your two questions, Frank.

Frank Chen

All right. Yes, yes, very clear. Can I have a very quick follow-up question on our margin? We are experiencing a loss temporarily. When do we expect a turnaround point in the future? When should we expect -- right.

Betty Ho

As I mentioned earlier that due to the economic headwinds and the fierce competitions in the market, we are actually experiencing a transformation period. And I expect that it will be -- for the coming two years, we are still at investment period, so at least another two more years.

Frank Chen

Sure. Thank you. Very clear. Thank you, Betty.

Betty Ho

Thanks.

Operator

Your next question comes from Bin Ding from JPMorgan. Please ask your question.

Binbin Ding

Good morning management. Thanks for taking my questions. I have a question on your growth strategies, especially the organic growth. So, I think advertising segment has become a very mature business with slowing growth across the Board [technical difficulty] the overall industry.

So, other than the disposal of Yidian, you mentioned a number of new initiatives and strategic investment, such as these two, content verticalization and IP strategy. However, [technical difficulty] verticals, we have seen intense competition from incumbents, leading players, who still have a lot of cash in this area.

I understood that we have committed 40% to 60% cash in strategic investment moving forward. But in my humble opinion, I think it might be better to concentrate our cash in some very promising areas instead of trying too many different opportunities. So, I was wondering if management have identified some very promising areas that could become an organic growth driver in the mid to long run. Thank you.

Shuang Liu

Yes. Thank you, Binbin. This is Shuang. You are quite right that advertising business is becoming a very mature business. But I also want to add that it still has room for further improvement.

For our core news app in the first quarter, admittedly, we experienced a deceleration in growth. But we have notably improved the efficiency of our algorithm and our content management process.

So, as a result of push and [Indiscernible] strategies as well as the integration of AI technology and our editorial expertise, our DAU actually has shown improvement in the first quarter. So, we are confident about the growth trajectory for the remainder of 2019.

It is worth to note, 2019 will still be a year of progress and development for our core news apps. Nevertheless, as we continue to invest in this development, we are laying down a solid foundation for the future growth in 2020. So, for our advertising business, we do think there's still room for further improvement, so it will also lead -- lay down the solid foundation for future growth.

And as we mentioned the strategic management, we definitely carve out a 30% to 40% of our proceeds, investment return proceeds, for future acquisition and investments. I think as I said in my opening remarks, there are -- the future investment will focus on area, which can achieve -- release the synergy, which is beneficial to our brand and address the unfulfilled needs of our core users. So, the content and AI and vertical areas will be the major focus.

Certainly, whether the target can bring a significant -- will -- whether the target can significantly enlarge our user base and better release our superior monetization capability is also a top concern. But for competitive reasons, at the present stage, I cannot disclose too much on the exact target.

But definitely, we have definitely identified several targets. We are in the process of due diligence and negotiations, but it's still not the time to disclose too much details. But we will keep the market updated on this. Thank you, Binbin.

Binbin Ding

Thank you, Shuang Liu. I have a quick follow-up. I mean four to five years ago, you spent around one-third or close to 50% of your cash in Yidian investments. So, moving forward, are we considering such large amount of investments like what we did five -- four to five years ago?

Shuang Liu

Four or five years ago. Yes, I think that's about the range. Yes, that's about it.

Binbin Ding

In a single company, like 30% to 50% of your cash position.

Shuang Liu

It's still too early to tell, yes. I'll keep you updated. Okay.

Binbin Ding

Okay. Thank you. Thank you very much. Thanks for the call.

Shuang Liu

Thank you.

Operator

Your next question comes from Chuck Li from First Shanghai Securities. Please ask your question.

Unidentified Analyst

Hi management, this is [Indiscernible] on behalf of Chuck. And my question is that we don't usually see Internet companies pay dividends and especially when concerning that you are still transitioning your business. So, what are you doing to -- what are you going to do to ensure your growth after you pay the dividends?

Shuang Liu

Thank you. This is Shuang. As for the dividend policies, I believe that less than 10% of all Chinese Internet companies have paid dividends in the past. Those who adopt a dividend policy are mostly activity engaged in the gaming business and are profitable. Currently, our market cap is deeply undervalued. And if you multiply the dividend payout ratio as planned, its equivalent to a large proportion of our current market cap.

In addition, we are still in a transitional period and expect to continue generating loss in the near future. So, while the Yidian transaction has provided a handsome return, it also meant that we relinquished an integral piece of our newsfeed and algorithm development strategy.

As a result, we'll need to explore additional investment opportunities that are capable -- as I said in my opening remarks that are capable of contributing to organic business growth.

The key areas that we can focus on includes enhancing our AI capabilities, expanding our content library, accelerating our user base expansion, improving the monetization capabilities of our apps, strengthening our brand influence and exploring more investment opportunities in new markets.

In fact, we already have identified a few key targets and we will keep our investors posted on our progress. And given our proven record in investment in the last four years, we invested in the [Indiscernible] and we achieved very handsome returns. So, we're confident going forward, we'll replicate this legacy. Thank you.

Unidentified Analyst

Thank you.

Operator

[Operator Instructions]

There are no further questions. At this time, I would like to hand the conference back to Qing. 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.

Betty Ho

Thank you.

Shuang Liu

Thank you all.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.