Q3 2019 Earnings Call Transcript

Published: 12 Nov 2019

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Phoenix New Media 2019 Third 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] I must advise you that today’s conference is being recorded.I would now like to turn the conference over to your first speaker today, Ms. Qing Liu. Thank you. Please go ahead.

[Qing Liu:]

Thank you, operator. Welcome to Phoenix New Media’s Third Quarter 2019 Earnings Conference Call. I’m joined here by our Chief Executive Officer, Mr. Shuang Liu; and Chief Financial Officer, Ms. Betty Yip Ho.On today’s call, management will first provide a review of the quarterly results and then conduct a Q&A session. The third quarter 2019 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. Despite macroeconomic uncertainties, we have upheld our core values of professional journalism in the digital era. Our mission is to leverage our distinctive combination of editorial expertise on AI algorithm to create a warm, fulfilling and empowering experience for our users.Our commitment to these bedrock values contributed to our solid financial performance, as total revenue in the third quarter increased by 15.4% year-over-year to RMB380.2 million. This growth rate was in line with our previous guidance and reflected our operational strength in 3 areas

[Betty Yip Ho:]

Thank you, Shuang. And thank you all for joining our conference call today. Our total revenues in the third quarter of 2019 were RMB380.2 million, representing an increase of 15.4% from RMB329.3 million in the same period last year. Our total revenue this quarter included both RMB40.3 million of consolidated revenues from Tadu and RMB80.1 million of consolidated revenues from Tianbo.I will now provide details on our revenues for the third quarter of 2019. Consolidated net advertising revenues for the third quarter of 2019 were RMB327.6 million, representing an increase of 16.4% from RMB281.5 million in the same period last year. The increase was primarily attributable to the consolidation of advertising revenues from Tianbo and Tadu.Net advertising revenues from our traditional business decreased by 16.2%, due to macroeconomic uncertainties and intensified industry competition. Pay services revenues for the third quarter of 2019 increased by 10% to RMB52.6 million from RMB47.8 million in the same period last year. Revenues from paid content for the third quarter of 2019 increased by 39.5%.It was mainly due to the consolidation of Tadu, which was partially offset by a decrease in the company's traditional digital rating business, due to the regulatory tightening on digital reading sector in China. Loss from operations for the third quarter of 2019 was RMB10.8 million as compared to RMB50.6 million in the third quarter of 2018. It was mainly due to a gain of RMB62.1 million arising from the changes in fair value of financial assets contingency.Returnable considerations for the third quarter of 2019, which represented the changes in fair value of the company's right to receive the contingent returnable considerations, in relation to the acquisition of Tadu, subject to certain price adjustment mechanisms based on Tadu's operating and financial performance in 2019 and 2020.Operating margin for the third quarter was negative 2.8% as compared to a negative 17.2% in the third quarter last year. Non-GAAP loss from operations for the third quarter of 2019, which excluded share-based compensation and changes in fair value of financial assets contingent returnable consideration was RMB67.6 million as compared to RMB54 million in the third quarter of 2018.Non-GAAP operating margin for the third quarter of 2019. which exclude share-based compensation and changes in fair value of financial assets contingent returnable consideration was negative 17.8% as compared to negative 16.4% in the third quarter of last year.High effective tax rate in the third quarter of 2019 is mainly attributable to larger taxable profits for the company's subsidiaries as compared to the third quarter of last year after considering the valuation allowance of deferred tax assets.Net income attributable to ifeng for the third quarter of 2019 was RMB5.9 million as compared to net loss attributable to ifeng of RMB16.6 million in the same period last year.Non-GAAP net loss attributable to Phoenix New Media for the third quarter, which excluded share-based compensation, income or loss from equity method investment, net of impairments and changes in fair value of financial assets contingent returnable consideration, was RMB50.8 million as compared to RMB18.3 million in the third quarter of 2018.Moving to our balance sheet, as of September 30, 2019, the company's cash and cash equivalents, term deposits, short-term investments and restricted cash were RMB2.06 billion, or approximately US$288.9 million, which excluded RMB18.4 million from Tadu and RMB131.3 million from Tianbo.Finally, I'd like to provide our business outlook for the fourth quarter of 2019. We are forecasting total revenues to be between RMB431.2 million and RMB451.2 million, representing an increase of 8% to 13% year-over-year. For net advertising revenue, we are forecasting between RMB370.9 million and RMB385.9 million, representing an increase of 4.2% to 8.4% year-over-year. For paid services, we are forecasting between RMB60.3 million and RMB65.3 million, representing an increase of 39.4% to 51%.Despite the backdrop of intensifying competition in the advertising industry as well as the current macroeconomic slowdown, we are confident about our future growth prospects as we continue to leverage our superior content leadership, by providing most relevant information to our users through the precise combination of editorial suggestion and AI algorithm.Meanwhile, we are actively optimizing our cost and expense structures to maximize our eye for our shareholders. We have already reduced over 20% of our organic G&A costs, aiming to reduce our next year's operating loss by half. Ultimately, we are hoping to turn profitable within the next few years despite the persistence of challenging market conditions.Before we start Q& A section, I would like to thank Shuang, the CEO of FENG, for giving me the opportunity to work for FENG for the last 6 years. I tendered my resignation as the CFO of Phoenix New Media for personal reasons, which becomes effective on November 14, 2019.It has been a great honor to work with a brand as iconic as FENG. It is with a heavy heart that I leave such a dynamic and collaborative workplace. Going forward, I'm fully confident that the company is well positioned for success in the coming years. With that, I'm turning the call back to our CEO, Shuang Liu, for few additional works.

[Shuang Liu:]

Thank you, Betty. We are extremely grateful for your past contributions and dedication to the company. In particular, your outstanding leadership has proven highly valuable to the company. We believe that the finance and accounting structure you have implemented will continue to serve us well going forward. On behalf of everyone at Phoenix, I wish you all the best in your future endeavors.Meanwhile, I'm pleased to introduce our Edward Lu -- Lu as our new CFO, with experience in various managerial positions at our company since 2009, Edward has a comprehensive understanding of both our company and the broader media industry. His expertise give us all of us confidence that an executive transition process will be very smooth.With Edward at the finance helm and the supportive team around him, we'll be able to adapt to changing market conditions well and position ourselves for renewed growth segment.Now operator, we are ready to open up the call for questions.

[Operator:]

Thank you Shuang [Operator Instructions] Your first question comes from Binbin Ding from JPMorgan. Please ask the question.

[Binbin Ding:]

Good morning management. Thanks for taking my question. First, I would like to thank Betty for his help during the few past years and I wish her all the best on the new journey and also congrats to Edward on the new role. I have 2 quick questions. First is, the use of cash from the sale of Yidian investment? And second is, when do you expect that the buyer will pay the remaining part of the acquisition fees? Thank you.

[Shuang Liu:]

Binbin, this is Shuang, thank you for your question. For now, we are still evaluating the use of proceeds from the sale of Yidian. I think we have to be very cautious of both the industry challenges and investment opportunities ahead of us. The Chinese media industry is evolving very rapidly, so we need to evolve with it. First, we think we'll continue to invest in product innovation to capture growth opportunities. At the same time, to mitigate the inherent challenges of expanding our business, improving our cash flows and sustaining organic growth. We will also continue investing in the improvement of our AI algorithm and propriety content production capabilities.Overall, we plan to achieve a balance between capitalizing our growth opportunities through strategic investments and sustaining organic growth by refining our core competitive advantage. So with this in mind, we'll use the proceeds to secure both our future growth prospects and long-term shareholder value. But, of course, we'll continue to update the market regarding our plans.As to the remaining balance, especially the risk associated with the remaining payments, we have established -- we have signed a concert party agreement and received a US$50 million deposit from the buyer to ensure that certain risks are mitigated. To elaborate, under the concert party agreement, the voting rights will be shared between us and the buyer after we transfer the US$200 million worth of shares to the buyer. And the buyer will act in concert with us until one of the following three conditions is fulfilled.Number one, the buyer pays the entirety of the remaining payment within three to six months after paying the first tranche. Number two, the buyer makes a payment of $200 million or the valuation of no less than 1.1 million – US$1.1 billion, within three months of the first tranche is paid. And the third, the buyer makes a deposit payment of US$13 million in addition to the original US$50 million deposits.So its worth to note that Yidian is currently remains on track to achieve its strategic goals. So in the worst-case scenario, if the buyer walks away from the transaction, we are still very confident in our capability to consolidate and operate Yidian efficiently.Thank you, Binbin.

[Operator:]

Your next question comes from the line of Frank Chen from Macquarie. Please ask the question.

[Frank Chen:]

Good morning, Shuang, Betty, and Edward on noting. I have only one quick question on the margin outlook. I think you did very good job in terms of cost control this quarter. And you did mention that you are going to half your operating loss in 2020. Can management share us the detailed plan on achieving that? Thank you.

[Betty Yip Ho:]

Hi, Frank. This is Betty. Thanks for your question. While, actually, in this quarter, you have noticed that our total traditional ad revenue, even though have decreased by 16%, but our mobile ad revenue was increased by 5%, which is very good as compared to the market.But our PC ad revenue has been continuing to decline due to the market situation. And from another perspective, let's take a look at our brand advertising and SME's clients. For our traditional brand advertising revenue, it has increased sequentially this quarter and is expected to be better this next quarter due to seasonality.However, our promgamtic buying advertising income, mostly our SMEs, have decreased significantly year-over-year due to intensified competition while our brand advertising decreased slower than the market due to our strong brand recognition in the market.Meanwhile, we also plan to optimize our combination of advertising and native marketing. This will be achieved by integrating our hot topic coverage with cross-platform marketing solutions for both online and offline events. We are also proactively exploring other potential innovations while planning for significant societal events in the coming years. Both of which we believe will help to boost our ad monetization in 2020.However, as for the macroeconomic we remain cautiously optimistic in 2020. If the uncertainties persist, we expect that our advertisers' budget will be further reduced. This is on the topline.In the bottom-line, in my script, I have mentioned that we have been initiated a lot of cost restructuring measurements including cost savings on project costs, which Shuang mentioned earlier. And also including on very straight regulations on our marketing expenses.So, out of all these initiatives, we have already reduced our G&A costs by 20%. So, we are going to further look into a cost restructuring initiatives. By doing so, we are hoping that our loss will be further reduced as compared with this year. And as we mentioned, we are looking forward to be profitable in the next few years.

[Shuang Liu:]

Right. Maybe I can add a few more words on cost restructuring initiatives. Basically, it lies in three areas. For user acquisition, we will start limiting our investments in areas with less efficient traffic acquisition. By prioritizing projects and channels with higher ROIs, we will reduce our user acquisition costs and improve the quality of our user base expansion.For the production of our proprietary content, for example, our IP projects will also carefully analyze the ROI of each project and adopted a stricter itemized review process for IP projects that produce lower margins. As part of the boarder strategy shift to focus on improvement in profitability over revenue growth, we'll choose now to invest project on the lower end of the margin spectrum when appropriate.Finally, we have implemented a rigorous review process for our pilot products. Pilot products that underperformed and lack a strong potential for driving user base expansion and the revenue growth will be abundant. So by doing this, we are confident that these efforts will significantly reduce our COGS in the coming years, as we are aiming to return to profitability in the coming two to three years. Thank you, Frank.

[Frank Chen:]

Thank you, Shuang and Betty. And Betty, wish you all the best in your next journey. Thank you.

[Betty Yip Ho:]

Thank you, Frank.

[Operator:]

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

[Carmen Zhang:]

Hi, guys. Thanks for taking my questions and I have two questions. One is why you changed the Media ad operating metric. And the second one is, can you share something about the brand advertising. Can you think it can continue its growth trend in 2020?

[Shuang Liu:]

Yes. Thank you, Carmen. Let me take your first questions. I think the improvement of our app's operating metrics is primarily a result of a more effective content management process and technological advancements. First, we enhanced our capabilities in covering hot topics and at a more precise way, by strengthening the internal reviewing process.Our editorial team is now meeting on a daily basis to choose the latest trending issues and producing related content. Secondly, we continue to leverage our AI technology to enhance our algorithm to improve accuracy and relevancy.During the quarter, we also rolled out updates -- upgrades to our ifeng news app our push notification features, which improved our effectiveness in the recommendation of content to new users. So as a result of it, we are now increasingly able to attract user attention with fewer push notifications.During the third quarter, this improvement translated to a 4% increase in user engagement level and a 12. 5% increase in user intention rate, as I mentioned in my opening remarks.Finally, we remain committed to striking a balance between keeping our user informed and entertained. Through our unwavering commitment to providing users with valuable, informative and thought-provoking content, we have a slate a solid foundation for our core media business.As we continue to upload these values going forward, we are confident that our operating metrics will maintain their healthy growth trajectory in 2020. So maybe Betty can further elaborate on the brand advertising and their trends.

[Betty Yip Ho:]

Hi, Carmen. As for our brand advertising for this quarter, our brand -- our traditional brand advertising revenues have increased sequentially this quarter and is expected to do better next quarter. But overall, our brand advertising actually decreased slower than the market due to our strong brand recognition. We have put a lot of initiatives to boost our ad advertising revenue.One major action is to integrate our hot topic coverage with cross-platform marketing solutions for both online and offline events. As we are doing a lot of events in the future, and we should expect that our costs will be increased as well. But by doing these initiatives, we believe that both of our -- no matter our brand advertising or SMEs clients will be increased in 2020. However, as I mentioned earlier, because of the macroeconomic uncertainties in 2020, so we are uncertain if the market is continuing to get worse. If this is the case, we expect that our advertisers' budget will be further reduced.

[Carmen Zhang:]

Okay. Thanks.

[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 Yip Ho:]

Thank you.

[Shuang Liu:]

Thank you, all.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.