Phoenix New Media Ltd (FENG) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Phoenix New Media First Quarter 2015 Earnings Conference 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, Wednesday, May 13, 2015. I'd now like to hand the conference over to your first speaker today, IR Director of Phoenix New Media, Mr. Matthew Zhao. Thank you. Please go ahead, sir.

Thank you, operator. And thank you and welcome to Phoenix New Media first quarter 2015 earnings conference call. I am joined here by our Chief Executive Officer, Mr. Shuang Liu; our President, Mr. Ya Li; and Chief Financial Officer, Ms. Betty Ho. For 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 2015 financial results and webcast of this conference call are available at the Investor Relations section of www.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 applies to this call as we will make forward-looking statements. Finally, please notice that, until otherwise stated, all figures mentioned during this conference call are in renminbi.

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

Thank you, Matthew. Good morning, and good evening, everyone. The first quarter marked the continuing evolution of our Company as an integrated news and information gateway in China. Despite the seasonal impact on advertising revenues associated with the late Chinese New Year, the temporary volatility due to the transition of our sales executive and our increased investments on mobile Internet, we made solid operational progress, which will lay the groundwork for long-term user growth and business expansion.

The core competencies of our business, namely content production capability, dedication to serious journalism and cutting-edge technology remain unquestionably strong. We are confident that with these strong fundamentals, the ongoing technical evolution of content recommendation of mobile and integration with Yidian, we are well positioned to capitalize on emerging opportunities in China's mobile Internet industry.

Now, let's start with the long-term strategic direction of the Company and how Yidian plays a vital role in this strategy. Ever since our inception, we differentiated ourselves from the portals by opting to produce high-quality original content and develop vertical information offerings for our users.

In recent years, facing trends of fragmented information consumption in the mobile age with advanced home force into the mobile Internet world by diversifying our content and enhancing our products in anticipation of mobile user demands. We rely on two key pillars of our business to achieve this goal. First, our news app focused on professional journalism and proprietary news contents. We believe that the ifeng news app is one of the most ideal and efficient platforms for user to consume the latest current affairs and other timely news coverage, especially when compared with the fragmented information available over the social media and other platforms. The rapid growth of our mobile user base has proven its popularity. Together with our mobile websites, the number of daily active users on mobile grew 25% year-over-year to 33 million in the past quarter. Meanwhile, we also noticed that there is a dynamic unfulfilled reading demand among users to explore and discover diverse web contents based on their interests during their spare time.

Yidian owns a proprietary interest engine which combines search and personalized recommendation technologies. By bridging these two key functions, Yidian delivers customized Internet content to each individual users. Through the ifeng news app and Yidian, we redefine how users find and consume information anytime, anywhere and on an any Internet-enabled device. In addition, supported by our other products such as ifeng video app, ifeng FM app and our mobile websites, ifeng's goal is to leverage the strengths and synergies of ifeng news and Yidian to become the next generation information gateway in the mobile Internet era. Yidian technology is a product of years of focus on developing data analytics and refining a search and recommendation solution for mobile information consumption, which is more precise and valuable to users.

Yidian offers a diverse selection of around two million interest channels for users to choose from, by either searching or subscribing. By tracking the act of selecting channels and exploring news topics on the parts of users, Yidian use personalized profiles for each user, and accordingly, push them content based on their demonstrated interests. Furthermore, the synergies between Yidian and ifeng's other news products are undeniable as they serve different markets and offer different user experiences, while benefiting from pooling resources and bridging our large respective user base.

Currently, Yidian has over 10 million daily active users. Keep in mind, Yidian not only (inaudible) our technology pillar, but also promotes our overall user base. It greatly expands the audience for our in-house journalistic content and vertical information offerings and allows access to Xiaomi's massive and rapidly growing market of smartphone users through pre-installations of Yidian. It also allowed us to offer advertisers a more effective product with additional benefit from the greater traffic associated with the user expansion. Lastly, Yidian has opened doors as we explore more e-commerce and O to O related business opportunities.

Now, I would like to turn the page to our ad revenue business and strategy going forward. We already began to see encouraging signs with many of these emerging advertising solutions, especially after our SVP, Andy Xu, recently assumed responsibility for advertising sales, marketing and then branding activities. Mobile ad revenue grew 135% year-over-year in the first quarter, as we successfully integrated our PC and mobile advertising sales team in an effort to consolidate resources and streamline our sales efforts. We see strong potential for accelerating mobile revenue growth in the future, as we grow out targeted ad solutions over Yidian in the second half of this year. Yidian's bank of user data and targeting technology, allow us to work with advertisers to develop an ad campaigns that are more relevant and manageable.

The acceleration of new advertiser growth is another key thing in 2015. ifeng's premium brand and competitive price have made us more attractive to brand advertisers compared with other traditional media websites. As a next step, we will focus on building our base of small and medium-sized enterprise clients by offering programmatic buying advertisement solutions, recognizing that advertises, regardless of platform, has increasingly desirable definition for their marketing activities. We raised the pricing for the majority of our A and A-plus inventory categories early this year and will consider further price increment in the future, based on market demand.

Furthermore, we continue to see significant progress on native marketing ever since it was launched a year ago. In the recent quarter, we developed a series of new highly effective native advertising programs, which all vastly exceeded expectations in terms of effectiveness, audience reach and interactivity. We'll continue to cooperate with our advertising partners, large multimillion RMB level native marketing campaigns across various industries, such as auto, energy, finance and e-commerce. We are also pleased with the broad-based growth across our vertical offerings.

According to iResearch, in the past quarter, we ranked Number 1 in news, fashion and real estate channels. We also completed the business unit restructuring of our ifeng Finance to provide more flexibility for the future development of our verticals. The enhancement of our finance vertical and the enrichment of a finance-related video program alongside the expansion of our official social media public accounts and high-end summit organizations characterized our strategy of offering more finance-related content and O to O services over our platform.

Through expanding the vast quality and quantity of our verticals would further broaden our impact of users and enhance our premium content offers. All in all, going forward, we are focused on improving our operational capabilities through growing our advertising clients and developing emerging ad solutions, as we execute around our long-term strategy of building the most useful and inflation platform information consumption in China's mobile Internet world.

With this, I'd like to turn it over to our CFO, Betty Ho.

Thank you, Shuang, and thank you all for joining our conference call today. ifeng's total revenue for the first quarter came in at RMB365.1 million, mainly driven by the advertising sales, with a year-over-year growth of 14.2%. Adjusted net income attributable to Phoenix New Media for the first quarter was RMB23.6 million, and non-GAAP net income per diluted ADS was RMB0.32.

Now let me take you through our financial highlights for the first quarter of 2015 results. The amounts mentioned here are all in RMB, unless otherwise noted. The differences between GAAP and non-GAAP are the adjustments of the share-based compensation, gain on disposition of subsidiaries and acquisition of equity investments and loss from equity investments.

Starting with revenues, net advertising revenues for the first quarter came in at RMB268.4 million, which represents a year-over-year growth of 14.2%. It was mainly driven by the robust year-over-year growth in mobile advertising revenue of 135.2%. Average revenue per advertiser or ARPA increased by 13.4% to RMB1.1 million, and the number of advertisers increased to 255.

Looking ahead, we expect some short-term volatility in terms of the ad sales during the second quarter of this year, mainly due to the transition of the sales executive. However, we are confident that the ad sales will rebound in the second half of 2015 and our net ad sales growth for the full-year will be in line with the industry growth. Paid services revenues for the first quarter was RMB96.7 million, which represents a year-over-year decrease of 20.9%. The decrease was due to the fact that we have trimmed the digital reading and mobile video businesses with telecom operators, as a result of the change of revenue sharing scheme. Games and others revenue decreased by 8.4% to RMB22 million. It was due to the decrease in revenues generated from web-based games on the Company's game platform, as well as the lower-than-expected revenues generated from the mobile games.

Secondly, gross profit and margins. Adjusted gross profit for the first quarter was RMB180 million compared to RMB186.2 million in the same period last year. Adjusted gross margin for the first quarter was 49.3% compared to 52.1% in the same period last year. In terms of cost of revenues, adjusted content and operational cost as a percentage of total revenues increased to 23.5% from 19.9%, mainly due to the increase in staff-related costs and advertisement-related content production costs. Revenue-sharing fees as a percentage of total revenues decreased to 14.1% from 15%, primarily due to a decrease in MVAS revenues. Bandwidth cost as a percentage of revenues remained stable at about 5.9%. And lastly, sales tax and surcharges as a percentage of revenues remained stable at about 7.2%.

Thirdly, adjusted operating expenses for the first quarter, increased by 19.6% to RMB158.2 million from RMB132.3 million in the same period last year. The increase in operating expenses was primarily attributable to the increase in stock-related expenses and expenses associated with the Company's marketing and promotional initiatives. Adjusted operating income for the first quarter was RMB21.7 million compared to RMB54 million in the same quarter last year. Adjusted operating margin for the first quarter was 6% compared to 15.1% in the same period last year, mainly due to the decrease in paid service revenues, seasonal impact on advertising revenues associated with the late Chinese New Year, the transition of the sales executive and the increase in staff-related costs.

Fourthly, adjusted net income attributable to ifeng for the first quarter was RMB23.6 million compared to RMB56.9 million in the same period last year. GAAP net loss attributable to ifeng for the first quarter was RMB11.2 million compared to a net income of RMB62.2 million in the same period last year. The difference between GAAP and adjusted net income attributable to ifeng was mainly due to the significant increase in a non-operating item loss from equity investments of about RMB20 million compared to RMB1.5 million in the same period last year and the decrease in another non-operating item. Gain on disposition of subsidiaries and acquisition of equity investments for the first quarter of 2015 was zero compared to RMB17.7 million in the same period last year.

Adjusted net income per diluted ADS for the first quarter was RMB0.32 compared to RMB0.73 in the same period last year. In terms of balance sheet items, as of March 31, 2015, ifeng's cash and cash equivalents and term deposits and short-term investments and restricted cash were RMB1.27 billion or approximately $204.6 million, immediately after closing of the last round of the investment in Yidian. At the end of April, the Company's cash and cash equivalents, term deposits and short-term investments and restricted cash were around RMB1.06 billion or approximately $171 million.

Lastly, I'd like to provide our business outlook for the second quarter of 2015. We are forecasting total revenues to be between RMB412 million to RMB432 million, representing a growth of 0.2% to 5.1% year-over-year. For net advertising revenue, we are forecasting between RMB322 million and RMB332 million, representing a growth of 10.7% to 14.1% year-over-year. For paid service revenues, we are forecasting between RMB90 million and RMB100 million, representing a decrease of 25% to 16.7%.

This concludes the written portion of our call. We are now ready for questions. Please go ahead operator.

Certainly. Ladies and gentlemen, we'll now begin the question-and-answer session. (Operator Instructions). Alice Yang, Macquarie.

My first question is for the advertising revenue. As the advertising revenue missed your previous guidance a little bit and the growth rate declined notably. So, I understand this is because of late [CNY] effect.

So my question is that, does that also related to some less robust advertising market that you observe since the results for first quarter, or is there anything worse than your previous expectation? How we can read through the first quarter advertising revenues throughout the whole year kind of top line guidance? And I have a follow-up.

This is Ya. Thanks for the question. First, yes, there are two additional courses which made the advertising revenue situation worse than we had communicated during our last conference call. First is the transition of our advertising sales team executive. Our CMO Ms. Jin announced her resignation for personal family reasons and due to this transition of the sales executive, there has been some temporary volatility. And we do see these affecting both Q1 and Q2. However, our new Senior Vice President in-charge of advertising team, Mr. Andy Xu, he was very seasoned advertising professional and we have seen a relatively smooth transition so far. So we are confident that this factor will gradually die out or decrease, and in the second half of the year, we will see the comeback of the advertising revenue growth.

In addition to this factor, there is also decision we made, which made us -- deducted almost RMB100 million advertising revenue, which would have been generated from our planned mobile advertising platform. This is a programmatic buying-related DSP/SSP model for advertising platform. We had planned to develop it ourselves. And it will have very low margin, but it's important trial or test to cope with the new programmatic buying trend. But later we decided that it's best to work -- to partner with the leading platforms instead of develop our own. So that would deduct RMB100 million in revenue for the whole year. However, it doesn't affect the bottom line, because the margin contribution originally was very low, and it would have been cancelled out -- the margin contribution -- profit contribution would have been cancelled out by the resources, investment we put into development of this platform.

So the sales executive transition and the mobile platform cancellation, these two factors actually affected our overall annual advertising revenue guidance. So right now, we are still looking at industry in line growth for both our PC and mobile revenue. And we do see the overall year advertise revenue to grow at 22% or -- around 22% or between 25% to 30%, if we exclude the real estate advertising revenue contribution in 2014. We had mentioned this last time that this year we decided not to include the real estate revenue contribution from one of our subsidiary into our overall revenue. So excluding that factor, we would still see annual revenue growth to be between 25% and 30%.

Understand. To make sure that I understand that clearly, may I repeat that. You said that originally you could have recognized RMB100 million as revenue from the planned mobile platform, but then you cancelled this plans, so that affected overall expectation for advertising revenue in 2015, but the investment has already been made. So that will have some kind of impact on the margin. Is that right?

Not exactly, because it's a gradual process to put investment into this project, and in the first couple of months of this year, we don't see a satisfactory results from the initial development. But the initial development cost wasn't that much. So, overall, it can be ignored. But we do have to deduct the RMB100 million revenue originally planned.

Understand. Got you. And my follow-up question is about your ad price upgrades. Can you share with us about the percentage price upgrade of your PC and also mobile site, and how is your further price upgrades planned in this year? Thanks.

In this first half, we increased our PC ad price by -- overall by like single-digit for the A-plus category to almost 10%. For video advertising, it was about 13%. Mobile advertising pricing overall was increased by 20%. And for the A-plus category of the mobile ad inventory, we increased price by 33%. And that's based on our continuous growth on both PC and mobile traffic. In our first quarter, we see the PC DAU grew by 16%, while our mobile asset grew by 25% year-over-year. And we do plan to increase, especially the mobile pricing in the second of this year.

Natalie Wu, CICC.

I've got a couple of questions. Firstly, a housekeeping question. Can you update us the prospectus of your advertisers and its contributions in the first quarter, respectively? And also can you give us some color on the current status of mobile inventory, CPM or CPT level and the trend looking forward? And I will have a quick follow-up.

This is Ya. First, the questions regarding advertising sector contributions, the top five sector stayed the same as before and it's -- first is auto and second is e-commerce, third is food, beverage and wine, the fourth is financial service and the fifth is medical and healthcare services. And the resin contribution almost the same as before, so we see this as rather stable.

And the second question regarding mobile advertising inventory, we have two categories of mobile assets. Our first is native apps, including the ifeng news app, ifeng video app and ifeng audio app, the ifeng FM. And for these assets, we do see the sell-through rates to be relatively higher than the industry average. And however we do see abundant unsold inventory on our mobile lab assets, the mobile ifeng assets has more than 20 million DAUs and recently, we are improving the user experience and also the advertising products on these mobile app sites. So in the future, our sales team can sell these mobile app ad inventory along with similar or the same advertising inventory on products on the native apps. And so we do -- overall we see enough mobile ad inventory on our 33 million DAU mobile visitors.

And you do have a question (multiple speakers). Yes.

Yes, and about the CPM and CPT level, can we see some more quantitative upside on this aspect?

Yes, I think just quantitatively speaking the -- for example, for some A-plus categories, the full-screen launching screen ad on our mobile native apps we'll sell it at a higher CPM rate than most of our peers. However, the CPM rate on our mobile websites is around 10 CPM, which has a lot of improvement potential. And on our PC, we sell our A-plus categories at a rate higher than sites like Tencent, but still lower than some of the leading -- some of the other portals.

That's very helpful. I have a further question on Yidian. I was wondering, can you share with us the update of (technical difficulty) with Yidian and the monetization plan on this aspect in the rest of the (technical difficulty).

Okay. Yes, we recently announced that the completion of the investment in Yidian on April 30, and at this time our priority is still to develop and enhance the product and also grow the user base. We determined to grow Yidian into the top mobile media apps in China. Yidian has been the fastest growing news-related app in 2014, it has reached almost 10 million DAUs overall at this time. So recently we are starting to developing and testing our advertising product also in partnerships with Xiaomi between ifeng and Yidian. And we can provide better targeted apps because of the interest engine, the innovative interest engine of Yidian. We provided our targeted app based on CPD download or CTC Click or CPS for e-commerce and lottery and CPM for brand advertising.

So it's a mixed model of advertising. And we believe that using the interest engine, we can offer interest apps which can deliver superior results and better advertising ROI measurable to many of the marketers. At this time, we do not give any -- we do not have any concrete number in terms of advertising revenue prediction. We do see advertising revenue to be generated starting the second half of this year and it should ramp up to large-scale to 2016.

(Operator Instructions) Binbin Ding, JPMorgan.

My question is also regarding Yidian. Just wondering if management can share some the progress on the monetization initiatives? And you mentioned Yidian is launching some personalized advertise and native ads and in the coming quarters. So I'm just trying to understand more about the launching schedule of this product and the detailed ad formats.

And also about your sales executive change, I guess, the new CMO, Chief Marketing Office is an expert in native ads. So will the appointment of new CMO will facilitate the monetization of Yidian as well? And how do you structure the monetization of your own native marketing solution and the monetization of Yidian?

This is Ya. First, more details about Yidian advertising launching schedule. At this time, we are in the testing period. We have selected a small percentage of the users to provide targeted ads, and we are working with Xiaomi's advertising platform to deliver these ads to the selected users on android phones. And first Yidian itself provides very critical role for both content discoverer of readers and also as a distributor to publishers, through this unique interest engine.

The interest engine enables users to express their interests, I think, more effectively and better than the pure search model or the pure recommendation engine, because when user expressly subscribe to one of the two million channels or keyword-based channels, and they indicate their real and true interests, it's not based on a guest recommendation or a one-time search. So I think -- we think that model can integrate the users' interests better and communicate the user profile better to our advertising engine.

As we mentioned that also because of the partnership with Xiaomi, so we can provide better advertising solution measurable by -- for example CPD, the downloads can be easily measured through the partnership with the hardware manufacturers like Xiaomi. And of course we also provide CPC and CPS model, as well as the CPM model for brand advertising model.

Ifeng has been very successful in providing brand advertising. And as you mentioned, Andy, who has been leading our native marketing efforts on ifeng, we have accumulated a lot of experience in brand advertising and we are actually helping Yidian building its own advertising sales team, which capable of both, delivering this performance ads as well as the brand advertising solutions.

The native stream ads on Yidian is mostly performance-based. The native marketing programs of ifeng is mostly content or brand advertising solutions. However because of the large user scale as its -- still expanding user base of Yidian we think that the combination of performance ads with brand ads on Yidian will make Yidian a very successful advertising marketing solution for many companies. And we do hope to provide more detailed information, I think in the second half of this year.

That's helpful. And then also quick follow-up on margins. I think the gross margin came in a bit higher than our previous expectations. So I'm just trying to understand that this trend going forward and also the operating margin trend?

This is Betty. In terms of operating margins, actually in this quarter, our operating margin came in at about 6%, which is mostly due to a seasonality effect and the transition of the sales executive, which may contribute to the revenue as we expected. And also for the operating expenses, we have a fixed cost, that's why the operating margin has shown a temporary lower number.

But looking at the full-year, as I stated in our earlier -- on our last conference call, that we are looking at our full-year's operating margins above 2% to 3% lower than the previous year. In 2014, the operating margin was about 17.8%, and this year due to the increased marketing initiatives on the traffic acquisition cost, during the earlier call, we mentioned that it will be around 2% to 3% impact on our operating margin, but we have been adopting a very, very tight cost control. So as a result, I'm expecting only 1% to 2% impact on our operating margin overall for the full-year of 2015.

[Eileen Ding] from Deutsche Bank.

This is [Eileen]. I have two questions. The first one is regarding the advertising price change plan. Is there any such kind of detailed plan rest of the year, as Ya just mentioned about the mobile price change in the second half. Could you give us more color on this one?

And the second is regarding the overall brand advertising budget. What we will see the industry demand this year? What is the trend you say that it's different from before? And also given some peers that have already planned to increase extensively their mobile inventory, we just see that your mobile revenue growth momentum (technical difficulty) given such competition?

This is Ya. First of all, the ad price change. I think just to clarify, what I mentioned was over the first half price change for our PC, video and mobile. And all of those three categories, mobile grew the most. In the second half, yes, we do plan to have further price increase, especially on the mobile. And I did mention that we are in the process of developing a better mobile app product, as well as mobile app ad solutions on that mobile app product.

In addition, as we continue to grow our ifeng news app through increased investment in marketing, especially pre-installation with leading handsets manufacturers, we do see the capacity to increase, especially in mobile price in the second half of the year. But at this time, we do not have a detailed plan yet.

And your second question regarding the overall advertising demand. At this time, we do not see any overall change, except for the first quarter of course, the late Chinese New Year did have some impact on some of our clients in delaying their advertising budget decisions. And one trend we do observe is the continuous migration or fastest growth on mobile advertising. So that's why we see 135% growth in the first quarter for our mobile ad revenue, and relatively flat for our PC. In the second half, I think also due to the transition cost uncertainty and we see our mobile ad revenue growth to be in line with the industry average. And also the Yidian's impact of mobile ad revenue will not be identified until much later this year.

I don't know if that answers your question.

Yes. That's helpful. Thank you.

(Operator Instructions) If there are no further questions, I'll hand your conference back to your speaker for any closing remarks.

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.

Thank you very much. Ladies and gentlemen, that does conclude our conference for today. Thank you so much for your interest. You may all disconnect.