Phoenix New Media Ltd (FENG) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Phoenix New Media Ltd. first-quarter 2011 earnings conference call. My name is Mary, and I will be your coordinator for today. At this time all participants are in a listen-only mode. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Matthew Zhao, Investor Relations Manager of Phoenix New Media. Please proceed.

Thank you, operator. Thank you and welcome to Phoenix New Media's first quarter 2011 earnings conference call. On the call with me today is our Chief Executive Officer, Mr. Shuang Liu; our Chief Operating Officer, Mr. Ya Li; our Chief Financial Officer, Ms. Lily Liu; and I am currently in charge of the Investor Relations at Phoenix New Media.

Before the management presentation, I would like to read you the Safe Harbor statement in connection with today's conference call. Our conference call may include forward-looking statements made pursuant to the Safe Harbor provisions for the Private Securities Litigation Reform Act of 1995. Although we believe that expectations reflected in our forward-looking statements are reasonable as of today, those statements are subject to risks, uncertainties and other factors not under the Company's control, which could cause the actual results, proponents or achievements of the Company to differ materially from results, proponents or expectations implied by these forward-looking statements. There can be no assurance as those expectations will prove to be correct. All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors and the details of the Company's filings with the SEC.

Phoenix New Media does not assume any obligations to update any forward-looking statements as a result of new information, future events, changes in market conditions or otherwise except as required by law.

About 5.00 PM in New York on June 22, we issued our first quarter of fiscal year 2011 earnings release. So we assume you have taken a moment to look at it. Before we continue, please note that unless otherwise stated all figures mentioned during this conference call are in renminbi.

Now I would like to turn the call over to Mr. Liu Shuang, our CEO.

Thank you, Matthew. Good morning, everyone. Thank you all for joining our first earnings conference call as a publicly listed company. Phoenix New Media, or ifeng, successfully became a publicly listed company on the New York Stock Exchange on May 12. I would like to take this opportunity to thank all of the investors who have been giving us strong support during the initial public offering, as well as post-IPO. We appreciate your continued confidence in our Company and believe we will continue to win your support through our persistent efforts and execution in the future.

The Company is uniquely positioned at the forefront of media convergence in China's Internet space. We have successfully built a strong brand leveraging our unique content and attracted a large and highly desirable user base and have become a disruptive force among the traditional Internet portals offering comprehensive services across all platforms.

Today we are excited to report to you that ifeng has an enjoyed a very solid first quarter 2011 while maintaining a strong business outlook. Two highlights I would like to share with everyone today are first, our strong and unique content has continued to drive strong user traffic growth on a monthly and daily basis; and second, we continue to deliver strong revenue growth through execution on our business strategy. Our first-quarter non-GAAP adjusted net income increased by 24.9% year over year, 18.5% quarter to quarter.

Then I would like to share with you our strategic priorities for the second half of the year 2011.

Turning to our first highlight, strong content has continued to attract strong user growth to our website. Ifeng has expanded from originally focusing on only delivering unique and exclusive content for our Phoenix TV to now providing a comprehensive online and mobile portal with over 40 interest-based verticals. Ifeng's content is now sourced from over 530 third-party sources, in-house production and UGC. Currently our top five most visited verticals include news, finance, entertainment, auto and fashion. Because of our exclusive international news coverage such as the Japanese earthquake and the capture of Osama bin Laden, investigative reports and interactive services across multiple platforms, we continue to attract the high-end users who highly value our independent perspectives. As a result, our average daily unique visitors increased by over 30%, and page views increased by over 40% from December 2010 to May 2011.

Similarly, our video vertical, v.ifeng.com, has experienced strong daily average unique visitor growth over 35% from December 2010 to May 2011. Since establishing a separate video business division, we have been committed to a differentiated media strategy by joining strengths from short-form news and information video clips used for convenient consumption and attractive advertisers.

On May 18, we announced the launch of Project Fengming where we will be implementing a differentiated video business strategy by establishing an online viewing, aggregation and distribution platforms for news and information videos. We will cooperate with approximately 400 TV stations and studios and work with approximately 2000 part-time video reporters nationwide to compile firsthand video news. We believe our video media strategy will further enhance ifeng's advantage in expanding our content sources, further targeting high-end users.

On the mobile front, our 3g.ifeng.com, which is a leading 3G WAP website, has attracted over 110 million daily page views in May as compared to 88 million daily page views prior to our IPO in March.

Now let me turn to the second highlight, revenue growth. Despite the fact that the first quarter is typically the weakest quarter for the advertising industry in China due to the Chinese holidays, we have recorded continued quarterly sequential growth in net advertising revenue for the past nine consecutive quarters.

Since we only recently began focusing on our monetization efforts for advertising in the year 2010, we still have significant room for growth in both the number of advertisers, as well as average revenue per advertiser. In addition, as we begin our strategic shift from 2G mobile services to 3G data-driven mobile services in 2009 where we will also see continued healthy growth in mobile value-added services, as well as future mobile advertising opportunities.

Lastly, we have seen increased brand awareness from IPO events. As we continue to imagine improving our user experience by seamlessly accessing our content either online or with any mobile devices, we are confident that we will be able to further monetize these initiatives with our proven business model.

Looking ahead our strategic focus for the second half of 2011 is twofold. One is the continued buildout of our online media platform with exclusive and unique premium content services. We have strengthened our editing and production team in our entertainment and fashion verticals and have made a significant push in education, health and travel-related content, helping to attract more female users to our website.

Over the past quarter, we made significant headway in delivering breaking entertainment news and in-depth coverage of events such as Prince William's wedding and the Cannes Film Festival. Secondly, building upon our proven ability for bringing quality content to our users, we will enhance the high degree of interaction between our audience and our companies and among our users themselves. We believe our high-end users who are more affluent, better educated and more mature as compared to the general Internet user public in China has its own unique set of needs that are unmatched by the other Internet media companies operas. We remain committed to increasing our investment in technology and product development to better fulfill their needs.

We are a pioneer in providing media applications to multiple devices, including mobile phones and tablets. Our media application, Phoenix station, has been in the top three ranked new applications on iPad in Apple's applications store for news-related applications.

During the first five months in 2011, our iPhone applications also have been installed about 2.6 million times. In an era of TV, mobile and Internet media convergence and backed by Phoenix TV, a leading TV powerhouse in the greater China area, on China Mobile, a world-class telecom operator, we are well positioned to continue leading in this space.

Ifeng's combination of fast user growth, exclusive and unique content, strong and respected brand awareness and the convergence of media platforms has positioned us to maintain our clear lead in China and further expanding our content offering and high-end user base.

Now let me pass to our CFO, Lily Liu, for a review of our first quarter financial results, as well as outlook for the second quarter.

Thank you and hi, everyone. I would like to go over our first quarter results in more detail today as only the headline numbers were provided in the recent development section of our IPO prospectus.

Our total net advertising revenues grew by 118%, reaching $11.5 million compared to the first quarter of last year. Our pay service revenues grew by 54%, reaching $14.7 million compared to the first quarter of last year. As a result, our total revenues grew by 77% to $26.2 million compared to the first quarter of 2010 and 8.5% sequentially.

Our net advertising revenues were supported by growth in both number of advertisers, as well as average revenue per advertiser. Our number of advertisers in the first quarter was 231, which represents a 58.6% increase compared to 137 in the first quarter of 2010. Average net revenues per advertiser was CNY330,000 in the first quarter as compared to CNY250,000 in the first quarter of 2010, which represents an increase of 29%. Net advertising revenue represented 44% of total revenues in the first product as compared to 36% in the first quarter of last year.

Also, in the first quarter, we have seen some healthy trends in advertising contribution by different advertiser industries. For example, we have seen an increase of e-commerce and Internet service advertisers, which mirrors the growth of the sector. We saw an increase in Financial Services advertising reflecting the current strong performance of China's domestic financial market.

In addition, we experienced an increase in education-related advertisements, reflecting greater traction in our education verticals' improved content offering. These increases combined with the advertising effectiveness of our media platform are driving more advertising dollars to ifeng, especially since these advertisers are placing significantly more emphasis on results-driven advertising.

For pay service revenues, we have three sub segments -- mobile Internet value-added services or what we call MIVAS; video value-added services or Video VAS, and Internet value-added services. Digital reading, mobile games and traditional 2G WVAS businesses are the three major components within MIVAS. MIVAS represented 49% of total revenues in the first product as compared to 59% in the first quarter last year. MIVAS will continue to slowly decline as a percentage of total revenues as net advertising revenue growth continues to outpace our paid service revenues growth. Overall our video value-added services represented 5% of total revenues in the first quarter of 2011 as compared to less than 3% in the first quarter of last year. In particular, mobile videos represented approximately 3.5% of total revenues in the first quarter as compared to less than 1% last year.

Lastly, Internet value-added services as a percent of revenues remained stable at approximately 2% of total revenues and will remain relatively stable going forward. In the first quarter, our GAAP gross margins was 33% compared to 47% last year. However, excluding the impact of share-based compensation expenses, adjusted gross margin for the first quarter was 42%, which represented an improvement compared to the 40% of last quarter.

The decline in non-GAAP gross margin was primarily due to two factors. First, we have increased our investment in content, including editorial staff and third-party content acquisition costs for both online and video content, and much of this investment is front-loaded in the year. Secondly, due to the product mix with higher percent of revenue from WVAS business within paid services, revenue sharing fees paid to telecom operators and channel partners such as handset manufacturers were higher in the first quarter as compared to the first quarter of 2010.

Our non-GAAP operating margin, which includes the impact of share-based compensation, was 14% in the first quarter as compared to 19% in the first quarter of 2010. However, this represents a sequential increase compared to 12.6% of last quarter. The decline compared to last year was primarily due to continued buildout of our sales force. Our non-GAAP sales and marketing expenses as a percent of revenues was 16.1% as compared to 14.8% in the first quarter of last year. Our non-GAAP G&A expenses as a percent of revenue decreased from 6.8% to 6%, and non-GAAP R&D expenses as a percent of revenue remained relatively flat at 6% compared to the first quarter of last year.

GAAP net loss attributable to Phoenix New Media was a loss of $4 million, and the loss attributable to ordinary shareholders was $89.9 million. The GAAP loss was primarily due to increased share-based compensation charges, which spiked due to the grant of restricted shares and restricted share units prior to the IPO. Share-based compensation expenses going forward will significantly decline.

Please also note that upon completion of the IPO we will no longer have the charges relating to the redeemable convertible preferred shares as the preferred shares were automatically converted to ordinary shares upon IPO. Therefore, in the third quarter, income attributable to Phoenix New Media and income attributable to ordinary shareholders will be the same.

Non-GAAP adjusted net income attributable to Phoenix New Media with share-based compensation expenses added back was an income of $3.3 million in the first quarter, which represents a 24.9% growth from the first quarter of last year, which also represents an 18.5% growth sequentially. Adjusted net income per ADS was $0.07 per ADS, which grew by approximately 10% compared to the first quarter of 2010.

Lastly, for the second quarter, we are expecting our net advertising revenues to grow 142% to 146% compared to last year, reaching CNY110 million to CNY112 million. This guidance also represents a sequential growth of 46% to 49%. Our paid service revenue is expected to grow 35% to 39% compared to the second quarter of last year, reaching CNY106 million to CNY109 million, and this also represents a 10% to 13% sequential growth. Therefore, our total revenues for the second quarter is expected to be CNY216 million to CNY221 million, which represents a growth of 74% to 79% compared to the second quarter of last year and a sequential growth of 26% to 29% growth.

With that, I would like to open the floor for questions. Operator, please go ahead.

(Operator Instructions). Chenyi Lu, Cowen & Co.

I have two questions. The first question I have regarding your WVAS business. This quarter WVAS accounted for roughly about 57 -- 67.5% of paid services revenue compared to 57.3% in 1Q 2010. My question here is, can you give us a view as to what the WVAS revenue growth in the remaining of 2011? Thank you.

Sure. Thank you. Overall there will be volatility from quarter to quarter in terms of the WVAS business. However, demand for WVAS business will be there regardless. On an annual basis, we are expecting to see 10% to 20% growth in this business without major policy changes from telecom operators. This business actually I want to mention has very low profitability. However, it is a business that generates positive cash flows and requires little additional investment. So overall regardless of the growth the business impact on our bottom line is minimal.

Okay. Great. So basically the first quarter is just the normal volatility and then it could go down to a normal level?

That is correct.

Okay. Well, now let me move onto the next question. Regarding your advertising business, again, this quarter was very strong, driven by the higher number of advertisers and also ASPs as well. So can you give us a view as to Internet overall your advertising business in terms of the remaining 2011? Thank you. Will you continue to grow the subscriber -- I mean the advertiser base and also the ASP as well? Thank you.

And, as you can see from our release about the second-quarter revenue outlook, our second quarter we reported even higher advertising revenue growth compared to the second quarter of last year of about 144% growth. And so overall we are very upbeat on the outlook of the out years' advertising revenue growth.

If you noticed, in the first quarter, the online advertising sector in China grew by 44% over last year, and we recorded over 110%. Thank you.

Okay. Great. Thank you. So basically the argument here is for the remaining 2011 you will continue to grow the advertiser base and also ASP as well?

Yes, in terms of -- if you look at -- yes, the first quarter our number of advertisers grew by 69%, and the ARPA grew by 13%. The second quarter we expect the number of advertisers compared to the second quarter of last year also to grow by a similar magnitude. However, the ARPA should grow at a higher rate, and in mid-term to long-term, the ARPA will contribute more to the growth of overall revenue.

Is it because of you have much stronger topic compares to it was in 2010, right?

Yes, it is because I think for each of the key advertising clients across the key industries we are gaining market shares over from other portals and other online media companies. And that will drive a bigger portion of our revenue growth.

(Operator Instructions). And your next question comes from Alex, your line is open. Please speak.

Good morning and good evening, everyone. It is Alexander here from Deutsche Bank. So a quick question on the advertising pricing front. Can you guys talk about the advertising recall increase in the share, and how does that compare to industry competitors? And also what is your outlook for next year? Thank you very much.

Okay. As we are -- I think as we informed you on the road show and we increased our overall rates by 71% last year, and on April 1 we had our first of two rate card increases for 53%. And right now compared to the competitors, you know, on the second quarter of 2011, SINA increased the rates by 17%, SOHU increased about 9%, and Qiyi increased to about over 40%. And the NetEase increased by 35%; however, NetEase only increase their rate cards once a year. That is based on the combination of over 80 of the most important ad positions from these portal sites.

And also, over last year our video rates increased from 100 yuan CPM to 120 yuan CPM, which is the highest rate card right now, we believe, in China. And going forward based on our continued accelerating traffic growth, we are very positive about our ability to increase our rate October 1, which we should allow us by the end of late August.

Sorry. I did not get the video rate card increase number. Can you say that again?

That percentagewise is about 20% over last year, and the video rate right now is already the highest in China compared to the other video only sites or portal sites' video rate cards. It is 120 yuan CPM rate.

Got it. Thank you very much. And a follow-up question is regarding the advertiser on your video side. Given that you guys have a very unique content, is there any other major difference in terms of the advertiser category compared to other major competitors on the video side?

Yes, I think compared to the pure-play video companies whose advertiser base tends to focus on the FMCG category, we have a broader advertiser base. Recently we had signed a significant video advertising contract with a leading automaker for original video documentaries and debate shows. And, in addition, we also have signed a major IT vendor, a tablet manufacturer and computer manufacturer, also for our mostly exclusive original content produced by ifeng.com.

And we have seen the advertiser's acceptance of our news-focused video strategy because the news video content does provide better branding capability for advertisers compared to the entertainment-driven or video sharing content.

Richard Ji, Morgan Stanley.

Congrats on a very strong quarter and also bright total outlook. I have two questions. First, let me start with advertising trend. Can you comment on your core advertising category? And, in particular, can you shed light on the growth profile for your e-commerce related advertising demand? Should that strong demand to sustain in the second half this year? And also, recently we are seeing some slowdown in the automotive sector, and so far we understand you have a very strong advertising outlook for 2Q. But do you see any impact from the auto industry slowdown?

Our top five categories for first quarter are auto, e-commerce, financial service, IT products, and food and beverage. Compared to the fourth-quarter 2010, the financial service and the food and beverage actually moved up, whereas the medical and health-related category dropped to become the number seven ranked sector.

In terms of the e-commerce sector, which contributed for about 12% in fourth quarter, has increased its share to almost 16% in the first quarter. And for the second quarter, we expect that to be about 14%.

We are working with the leading e-commerce manufacturers both the pure-play, as well as the traditional retailers' e-commerce efforts. However, we are very careful about working with the Groupon-like companies, and also we are very careful about the payment terms working with these e-commerce companies. We are seeing very strong demand, and because our brand (inaudible) as a branding, in fact, these advertisers want and also our users profile provides the best purchasing power for these advertisers.

So overall we are still optimistic about the second-half growth of e-commerce. As a percentage of our overall revenue, we expect that to be relatively stable and we have increased our FMCG, food and beverage and other financial service categories.

For other sectors, it has dropped from 30% in fourth-quarter 2010 to about 24% in the first quarter of 2011. However, this is due to a seasonal fact because that is across the industry and that is across the year.

Starting the second quarter, we did feel the pressure especially in April; however, the second quarter, despite of our overall ad revenue growth of over 140%, other sector will keep its share of 24% with a slight increase in second quarter over its first quarter as an overall percentage of our overall ad revenue. Our number one advertising client was a Japanese automaker in the first quarter of 2011, and we do expect that to stay in more or less the same in the second quarter.

So material-wise we don't see an impact of all the sectors softness to our overall revenue growth, and I think that is our view.

Thank you. And my second quarter is very quick. Regarding your previous service, especially for mobile digital reading which appears to be a very robust growth driver for your Company, and can you comment on the paying subscriber growth for that particular area? And also going forward, as we are seeing your revenue sharing with mobile carrier, as well as channel partners have been rising quite rapidly, how should we look at that revenue sharing trend going forward?

As I will answer actually your second question first. You mentioned that there is an increase in revenue sharing fees. I would like to clarify that our increasing revenue sharing fees for the first quarter was, in fact, due to a product mix issue, which means WVAS business as a percent of the total paid services revenue was higher in the first quarter compared to the same quarter last year. And the WVAS business being 2G business generally speaking has a higher revenue sharing fee percentage. The revenue-sharing fee percentage themselves for the different products actually remained quite stable for the quarter.

And, as I think we mentioned earlier, WVAS business actually is a bit volatile. So there may be -- we may see volatility from quarter to quarter for the 2G services.

In terms of your first question on digital readings, digital reading or e-reading business is a business that we recently launched at the end of last year. And, again, we are one of the three top content providers for China Mobile for this new business. We are expecting very significant growth in digital readings, so which -- and the growth will primarily come from subscribers -- number of subscribers growth. And for this business -- however, since it is new, so, again, from a quarter to quarter perspective, there may be some volatility. But overall, on an annualized basis, we are expecting growth of well over 50%.

Okay. Great. That is very helpful. Thank you.

Steve Zhang, Macquarie.

So I just want to ask about the sales force buildup. At this point which regions are you expanding in, and how much headcount have you added in the first quarter and which industries are you hoping to expand in?

At the end of last year, we had about under 150 people in our advertising sales force. Right now we have about 180, and we expect the number to grow to more than 250 by the end of this year. And we recently also made a hire of two key positions. One is director for advertising product and advertising technology and also another hire in charge of our national video ad sales. We expect the most headcount increased from these two teams, which will both increase our advertising ROI delivered to the clients and also our video ad sales.

In terms of the industry, we are also beefing up our FMCG and healthcare-related ad sales team.

Okay. Great. And also a second question, you have been investing content. So are you seeing the kind of increased traffic that you are hoping for with the investment in content?

I think for both our online, our video and mobile traffic we are the fastest growing top Internet company in China, both traffic across three channels and also revenues from both advertising and paid services. And the investment in content are both from content acquisitions from third-party professionally generated content and less in-house produced more exclusive differentiated contents. And in areas of both entertainment lifestyle and also those areas with great commercial potential such as auto, such as real estate, such as healthcare, education. However, because our convergence model and also our news documentary-driven online video content strategy and our costs are rather contained as a percentage of our revenue. So we can achieve more sustainable growth of our content expansion.

I want to emphasize that our traffic growth approach is different from traditional online video sites. They are more typically directly related to content acquisition. Our traffic growth has adopted an organic approach. We have reached the tipping point. In the last five years, we invest heavily in content buildout, in team buildup and the building of our infrastructures. So that is the beauty of a platform-driven business. So we benefit from this kind of approach.

And secondly, our triumphant coverage of the major world events and the entertainment events in the last couple of months also significantly boosts our traffic. So this kind of traffic growth requires minimal content acquisition.

Jack Huang, your line is open. Please proceed.

Okay. Thanks for taking my questions and congratulations. I'm just wondering if you could share with us the ifeng weibo development?

Yes, actually we are still at the stage of finalizing our new advanced product, which is an improved version of our original weibo product. So I think that it's a perfect combination of immediate D&A and a very interesting, exciting SNS features. But we're still at the stage of about launching an internal test run of this product. So it is a little premature to talk about too much about the details of the product. By the way, we think it is a very exciting product, and we are going to heavily invest in this product.

We are also evaluating different strategic options whether to team up with strategic partners or to develop our SNS product organically. We are very encouraged by the positive sign that recently we have been approached by numerous SNS players for deepening cooperation. I think they do value our brands, our high quality user base, and proven content to optimize their user base to enhance their user thickness. And for us we definitely want to attach into the youngster users of these SNS sites. So we believe if we handle this smartly, there definitely could be a win-win situation. So we are exploring the opportunities to further jumpstart our SNS business.

Okay. Thanks. And a second question, do you have a mild initiative on social products like waveform or SNS?

Yes. As I just mentioned, we do have our own weibo product, and right now with features developing our improved version of the weibo product, which is a combination of the SNS feature and the media -- our media DNA. And at this stage because we are -- we have not -- we are closed to launch the test run of the product, so it is still a little bit premature to talk too much about this product feature. But we think it's going to be a very exciting product, and it is going to better serve other users' needs, and we are also evaluating different kinds of options whether to team up with other partners or to develop this product organically. And I don't know if this answered your question.

Okay. Thanks.

Alex Yao, Deutsche Bank.

Two more very quick questions. Can you talk about your exposure to group buy business in terms of both of number of advertisers, as well as the revenue contribution?

The second one is I think that there is a concern that the credit tightening in China could potentially slow down the economy. So both the bigger advertisers, as well as the smaller advertisers, will cut down their ad spending. Have you felt anything on this front?

First, we have very minimum advertising business from Groupon type of companies, and we did work with certain high-end Groupon companies, especially for the mobile advertising or mobile commerce opportunities. As our mobile Internet and mobile application users are having these smartphones and with greater purchasing power and can probably better measure the results by turning the cell phone into a purchase point of devices. And so we think the dynamic or the volatility in the Groupon type of business should have minimal impact on our overall advertising revenue.

And secondly, in terms of overall macroeconomic slowdown, or the feared slowdown in China, since we work with less momentum-driven advertisers and we work mostly with the well-known international and domestic brands. And so we believe we can perform much better than the overall industry as we have seen in the stronger second quarter advertising revenue growth over the second quarter of last year as compared to the first quarter's comparison.

I show no questions at this time. (Operator Instructions). I am showing no questions. I would like to hand the call to Matthew Zhao for closing.

Hello, everyone. We have come to the end of our Q&A session and our conference call. I apologize again for the inconvenience due to the technical problems from the operators. Please feel free to contact us if you have any questions.

Thank you for joining us on this call. Have a good trading day. Bye-bye.

Thank you for your participation for your conference call. This concludes the presentation, and you may now disconnect.