Phoenix New Media Ltd (FENG) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Phoenix New Media Fourth Quarter and Fiscal Year 2017 Earnings Call. (Operator Instructions) I must advise you that this conference is being recorded today, Tuesday, the 13th of March 2018. I'd now like to hand the conference over to your first speaker today, Ms. Nicole Shan. Thank you. Please go ahead. 7

Thank you, operator. Thank you, and welcome to Phoenix New Media Fourth Quarter and Fiscal Year 2017 Earnings Conference Call. I'm joined here by our Chief Executive Officer, Mr. Shuang Liu; and the 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 fourth quarter and the fiscal year 2017 financial results and the 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 note that unless otherwise stated, all figures mentioned during this conference call are in renminbi.

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

Thank you, Nicole. Good morning and good evening, everyone. In the fourth quarter of 2017, we carried through our strong growth momentum from the previous quarters and achieved strong growth in our advertising revenue. Our total revenues increased by 12% year-over-year to RMB 462 million, which exceeded the high end of our previous guidance range. In particular, our net advertising revenues increased by 16% year-over-year to RMB 411 million, primarily driven by a 63% year-over-year increase in our mobile advertising revenues.

Looking back in 2017, the Chinese media landscape continued to evolve, and the regulatory environment has been under very tight scrutiny. As a Chinese-leading professional news distributor who has been focusing on providing high-quality news and current affairs, we appreciate and embrace the new policies against fake and vulgar media content as it enables FENG to be able to take advantage of our core competencies in providing professional journalism as well as tasteful and newsworthy content to our users around the world. It further endorses us to stay at the forefront of the media space and will enable us to capitalize on this market trend going forward.

After the conclusion of the 19th National Congress of the Communist Party of China in October 2017, we properly followed the government's guidance and introduced several initiatives to promote the themes of poverty relief and charity. For example, in October 2017, we organized the Super Charitable Mom charity event, where we donated RMB 5 for every up-vote we gathered to help autistic, disabled or abused children. Later in December, we hosted the 2017 ifeng Beautiful Childhood Charity Gala, raising over RMB 46 million for the foundation.

We are very excited the government supports our long-term charity endeavors and encourage companies like us to continue our work on social issues. We're honored to be able to utilize our resources and broad influence to contribute to society. We are also pleased that, in doing so, our premium brand gains additional recognition from our users, which consequently attracts more advertisers.

Fourth quarter ARPA increased significantly by 26%. In addition, pragmatic advertising achieved over 100% year-over-year growth during the previous 2 consecutive quarters and 71% year-over-year growth in the past quarter. We also developed an app for advertising agencies on the Fengyu platform, the first of its kind in the industry. This app enables managers to maximize the efficiencies and ROI of their ads by allowing them to monitor and adjust their ads anytime, anywhere.

As for brand advertising, we continue to optimize our native advertising solutions where we help our clients develop advertorials by merging their ads into informative articles. By doing so, we improved both the click-through rate and the conversion rate of our clients' ads by delivering them to more people than ever before in a more value-added way.

With respect to our live broadcast and the video streaming strategies, we remain committed to reporting major global affairs with an emphasis on news that attract Chinese audiences. An example is our reporting of the controversial Jiang Ge Tokyo murder case in November. As the first major media outlet in China to report the story, our 10-day coverage of this case, including the live broadcast of the trial, generated over 50 million views and became the primary portal for Chinese citizens to follow the case.

During the quarter, we also explored new initiatives to further enrich our content offerings and create our own intellectual property. Partnering with Shenzhen Media Group and the Guangzhou Wyan Culture & Media, we launched A Journey Through Literature, (foreign language), an innovative TV miniseries that explores Chinese culture and its philosophy. More than 150 million views were generated on ifeng during the show, a 6-week broadcast. The program has been well received by audiences and was praised by the People's Daily. We are committed to building competitive IP and providing additional premium content to our users, thereby attracting brand advertisers. We expanded our product line by adding a new paid knowledge-sharing product, called Zhizhi. We have invited celebrities, including Ao Li and journalists and talk show hosts, Luyu Chen, to provide professional knowledge to our users. We believe that our strong media DNA will help us to broaden our market share in this field.

Now let me turn to Yidian, our personalized news investment, which saw its full year growth revenue triple to RMB 1.5 billion. Yidian has been expanding its distribution channel to other handset manufacturers in order to increase its organic traffic growth. In addition, we plan to connect Yidian to our programmatic advertising platform, Fengyu, to better utilize Yidian's traffic. We expect the synergy between Yidian and Fengyu to improve the monetization capability and efficiency of both platforms. Further, as Yidian continue to benefit from the license for intra news information service issued by the Cyberspace Administration of China, we believe the value of Yidian will increase substantially. And we expect Yidian's strong growth momentum will carry into 2018.

Finally, let me give you an update on our digital reading business, Fanyue Novels. In the fourth quarter, we continued our efforts in terms of diversification and talent cultivation. We broadened our reading categories by adding 2 of the most popular genre with our younger target demographic, chat stories and comics. We also brought in several renowned novelists with award-winning works to further enhance our content production capabilities. Consequently, our digital reading revenue increased by 51% in the full year of 2017 compared to 2016. We're confident that with our diversified content offerings and strong content production capability, digital reading will become one of our major growth drivers in the quarters and the years ahead.

I'm very excited about the progress we achieved in 2017 in an environment of increasing competitiveness, regulatory change and scrutiny. To stay ahead of our competition, we will continue to grow our user base and expand our market share by investing in traffic acquisition. We have also taken active steps towards improving our profitability and controlling our channels -- channel costs to maintain the sustainability of our growth and our ecosystem. While we continue to prudently invest in our traffic acquisition, we are closely monitoring the return on our investments. Our focus is to improve our user acquisition, retention and usage duration rate through content and product enhancements instead of relying solely on traffic acquisition spending.

With our brand influence, credibility, professional journalism and the synergies between our business segments, we believe we're well positioned to capture the opportunities ahead and deliver long-term value for all of our shareholders. With this, I will turn the call over to our CFO, Betty Ho.

Thank you, Shuang, and thank you all for joining our conference call today. I'm pleased to announce that we once again delivered solid quarterly financial results and closed out a China New Year on a high note. Ifeng's total revenue for the fourth quarter of 2017 increased by 12.1% to RMB 461.8 million from RMB 411.9 million in the same period last year, which beat the high end of our previous guidance. This growth was primarily attributable to the 62.6% increase in mobile advertising revenues. Non-GAAP net income attributable to Phoenix New Media for the fourth quarter of 2017 was RMB 11.6 million, and non-GAAP net income per diluted ADS was RMB 0.16.

Now let me take you through our financial highlights for the fourth quarter of 2017. The amounts mentioned here are all in RMB, unless otherwise noted. The differences between GAAP and non-GAAP consist of share-based compensation and gain or loss from equity investments, including impairments.

Starting with revenue. Net advertising revenues for the fourth quarter of 2017 increased by 16.3% to RMB 410.5 million from RMB 353.2 million in the same period last year. The increase was primarily due to a 62.6% increase in mobile advertising revenue, which was partially offset by an 18.1% decrease in PC advertising revenues. Paid service revenues for the fourth quarter of 2017 was RMB 51.2 million as compared to RMB 58.7 million in the same period last year. Revenues from digital entertainment for the fourth quarter of 2017 decreased by 12.9% to RMB 39.5 million from RMB 45.4 million in the fourth quarter of 2016. This was due to a 27.7% decrease in MVAS revenues, partially offset by a 19.2% increase in digital reading revenues to RMB 17 million. Revenues from games and others decreased by 12.1% to RMB 11.7 million from RMB 13.4 million in the same period last year, which was primarily due to the decrease in revenue generated from web-based games on our own platform.

Non-GAAP gross profit for the fourth quarter of 2017 increased by 23.6% to RMB 254.3 million from RMB 205.7 million in the same period last year. Non-GAAP gross margin for the fourth quarter increased to 55.1% from 49.9% in the same period last year. The increase in gross margin was primarily attributable to the increase in revenues and decrease of certain cost of revenues as stated -- as follows. Non-GAAP content and operational costs as a percentage of total revenue decreased to 30.8% from 33.9% in the same period last year. This was mainly driven by the company's strict control of general operating costs. Revenue-sharing fees as a percentage of total revenue decreased to 2.7% from 4.2%. Bandwidth cost as a percentage of revenues decreased to 2.8% from 3.7% in the same period last year. Sales tax and surcharges increased slightly to 8.6% as compared to 8.3% in the same period last year.

Non-GAAP operating expenses for the fourth quarter of 2017 increased by 39.6% to RMB 255.1 million from RMB 182.7 million in the same period last year. Non-GAAP operating loss for the fourth quarter was RMB 0.8 million as compared to non-GAAP operating income of RMB 23 million in the same period last year. Non-GAAP operating margin for the fourth quarter was negative 0.2% as compared to 5.6% in the same period last year. The decrease was mainly due to the increase in mobile traffic acquisition expenses. As competition increases in the news feed sector, we will continue to invest in traffic acquisition while diligently monitoring ROI.

Net income attributable to ifeng for the fourth quarter of 2017 was RMB 11.8 million as compared to RMB 39.8 million in the same period last year. Non-GAAP net income attributable to ifeng for the fourth quarter was RMB 11.6 million as compared to RMB 41.4 million in the same period last year. Non-GAAP net income per diluted ADS for the fourth quarter was RMB 0.16 as compared to RMB 0.57 in the same period last year.

Now I will discuss our balance sheet. As of December 31, 2017, the company's cash and cash equivalents, term deposits and short-term investments and restricted cash were RMB 1.44 billion or approximately USD 220.9 million. Restricted cash represents deposits placed as security for banking facilities granted to the company, which are restricted as to their withdrawal or usage.

Let me briefly run through the key figures for fiscal year 2017. Total revenue for 2017 exceeded our expectation and increased by 9% to RMB 1.58 billion from RMB 1.44 billion in fiscal year of 2016. Net advertising revenue increased by almost 10% to RMB 1.35 billion from RMB 1.23 billion in fiscal year 2016, of which mobile advertising revenue increased by 46.5% year-over-year, which was partially offset by the decrease in PC advertising revenue.

Paid services revenue increased by 4.2% year-over-year to RMB 221.6 million. The increase was mainly due to the increase of digital revenue, which increased by 51.3%. Total fiscal year 2017 non-GAAP gross profit increased by 19.5% to RMB 852.9 million, which represents a 54.2% non-GAAP gross margin as compared to 49.4% last year.

Non-GAAP operating income for 2017 decreased by 3.8% to RMB 35.8 million as compared to RMB 37.3 million in the fiscal year of 2016. Non-GAAP operating margin was decreased slightly to 2.3% from 2.6% in the fiscal year of 2016. Non-GAAP net margin for 2017 was 3.3% as compared to 5.8% in 2016. Non-GAAP net income attributable to ifeng for 2017 was RMB 52 million or RMB 0.70 non-GAAP net income per diluted ADS.

Lastly, I would like to provide our business outlook for the first quarter of 2018. The company has adopted a new revenue standard, ASC 606. Revenue from contracts with customers which took effect on January 1, 2018. By applying the modified retrospective method under the new accounting standard, sales taxes and surcharges previously presented as a component of cost of revenues are now presented as a reduction item of revenues, and some advertising-for-advertising barter transactions previously not recognized as revenues are now recognized as revenues since January 1, 2018. For comparative purposes, we are forecasting total revenue, under the old revenue standard as opposed to the revenue guidance provided under the new revenue standard in our earnings releases, to be between RMB 299.2 million to RMB 314.2 million, representing an increase of 1.6% to 6.7% year-over-year. For net advertising revenues, we are forecasting between RMB 261.9 million and RMB 271.9 million, representing an increase of 8.6% to 12.8% year-over-year. For paid service revenues, we are forecasting between RMB 37.3 million and RMB 42.3 million, representing a decrease of 30.1% to 20.7%.

In summary, by controlling traffic acquisition expenses as well as other operating expenses, we turned around to become profitable as compared to our initial budget for the full year of 2017, which exceeded our expectations. Though we see fierce competition in news feed sector, we believe our transition to mobile has paid off and our serious journalism can be fully appreciated amid the current environment, thus we expect our 2018 operating results will be better than 2017.

This concludes the prepared portion of our call. We are now ready for questions. Operator, please go ahead.

(Operator Instructions) We have our first question from the line of Wendy Huang from Macquarie.

This is Frank Chen on behalf of Wendy Huang. I have 2 questions. The first one is about digital reading. I noticed that the growth rate of digital reading revenue was 19% year-over-year in this quarter. I wonder if there's any particular reasons behind the slowdown of the growth rate. And the management mentioned that digital reading will be -- will continue to be the key growth driver in 2018. How should we look at the growth rate of this sector in this year? And I wonder if management could share any color on the operating data of the digital reading segment? For example, the user traffic, including the MAU, DAU and as well as paying user account. The second question is on Yidian. May I ask Yidian's revenue target for this year? And what's the current user traffic of Yidian? And could you give me -- give us some update on Yidian's next round of financing as well as what's our plan of consolidating Yidian? That's all of my questions.

Thank you. This is Betty. Let me answer your question with respect to the digital reading first. [Our digital reading is categorized into digital entertainment, which actually only consists of our total revenue of less than 10%] (corrected by company after the call). So although it's a very strong, growing business, but the size is still relatively small as compared to our advertising revenue. Our digital reading, actually, the revenue in 2017 has grown over 50% as compared to 2016, and we are expecting this strong growth will be continued as we actually added 2 new products, which is live chat and -- -- chat reading and comic books. So these 2 products will enhance our revenues and top line going forward. Actually, the digital reading, actually, grew out of our PC and WAP page. So actually they launched the Fengyu apps only late last year, so it's still growing. The size of the DAU is relatively small, so we tend not to disclose at this stage. As for the Yidian's user traffic, actually, currently, this -- as of February this year, the DAU has remained very similar to last quarter. The major reason was because of the 19th Congress and followed by the 2 sessions of Congress and also because of the Chinese New Year. So the DAU -- we don't see a significant growth of the DAU of Yidian. And in terms of the financing and consolidation, I'll let Shuang to answer your question.

Yes. As to year-round financing, the legal closing is already closed. The year-round financing -- the financial holding of year-round financing, I think, we have been informed by a related party that will be closed by the end of March, by the end of this month. So we will disclose every information in due course. As to F round financing, actually we don't have a specific timetable for round F. The details will be discussed after year-round is financially closed. Normally, a deal will take 6 to 9 months to close. As a leading mobile news and information service provider, Yidian is definitely one of the most promising capital sectors. It's warmly welcomed by the investors. As the first non-state-owned company to receive the license for Internet News Information Service, Yidian is differentiated from other Internet news service providers in China. So it is expected to gain additional competitive advantage in channel expansion and content operation. We have been having preliminary meetings with different types of investors and have found Yidian is well received by the capital market. But we cannot disclose the exact timetable for F round financing. As to consolidation, as I mentioned, Yidian is our strategic investment, so the right to consolidate Yidian's financial statements is a very important right for us. The reason we didn't disclose -- we didn't consolidate Yidian's financial statements is because Yidian is still at an early stage. So from a competitive point of view, we don't want to disclose Yidian's key operating metrics at present stage. So after consulting with Yidian's shareholder and auditors, we set the operating benchmark, operating metrics. When Yidian hit that target, we will consolidate Yidian's financial statements. But now there are new developments further complicating the best timing to consolidate Yidian's financial statements. Number one, Yidian's -- there's 2 encouraging developments. One is Yidian's browser user growth is very strong, and it seems to -- such that there's a new opportunity for us to reallocate resources to capture this opportunity. So this will affect the key operating metrics. The other development is China's CSRC is reported to be ready to issue new policies to favor certain VIE-structured companies to come to Asia's market. These companies, with market cap reaching certain level and operating in certain industry, will be specifically favored. Yidian Zixun definitely fall into that category. So that grants us more options to best maximizing shareholder value. So these 2 new developments complicate the -- actually has very deep implication on our further lifting user growth and operating strategies. So we will monitor these new developments to decide whether -- when is the best timing for us to consolidate Yidian's financial statements. I think in the next 2 or 3 quarters.

Our next question is coming from the line of Binbin Ding from JPMorgan.

My first question is on the regulatory environment. It seems like there's a tightening on regulations across media and the overall content business in China over the past few months. Does management think this is more of a short-term hiccup because of the ongoing National Congress meetings or it could be a long-lasting situation? And also, what's the potential impact on us and other media formats, such as social media, video streaming platforms and other mobile news applications? That's my first question.

This is Shuang. I think the regulatory grip on this market is understandable. First, it's because of the ongoing China's annual Two Sessions, one is CPPCC and the other is NPC, so they're totally understandable, that happens every year. And the second is, with the proliferation of news feed products, the competition among the players is intensified. So there are some problems in this market. Some players try to leverage algorithm to capture more users. Some even go further to try to exploit the vulnerability and weakness of human nature by using fake news, exaggerated titles and even vulgar content to capture users' eyeball to improve click-through rate, to extend time spent. So this is no good for the healthy development of the industry. The supervisory body of the government recognize these problems, trying to crack down on this practice. So we fully endorse this policy. And I think the policies are in the right direction. Of course, it has an impact on operations of all these news feed products, even social networking service providers. But I think the impact is limited, especially for us. Phoenix New Media, we, as a responsible media player in China, we have made it clear in numerous industry summits, including the Worldwide Internet Forum in Wuzhen, we have been integrating our social responsibility, professional journalism and in-depth understanding of media consumer behavior into our Internet algorithm, and we want to combine artificial intelligence with human judgment to achieve our mission, which is to inform, to entertain, to enlighten, to empower our users, to stop the prejudice, to instill value, to broaden the horizon, not the opposite. So because of our media DNA and our serious journalism, I think we are good at it. That's what differentiates from others. So pretty certainly, we think the new regulatory change will certainly have an impact on the market, but the impact is short and limited. And from mid and long-term point of view, it's very good for the healthy development of the market. And I think we will fully support it, I think we will benefit from this eventually.

Okay. And my second question is on the video content. Can management give us some color regarding what's the percentage contribution from video content in terms of both time spent and active user base for both ifeng and Yidian platforms? And also, a related question is on the verticalization of mobile information apps. You look at one of the major competitors, Toutiao, I think they have successfully spun off a number of vertical channels into independent mobile apps covering short video live streaming and even automobile sector. All of these apps have achieved a decent user size over the past year. So I was wondering if management could share your insights on such a strategy. And in terms of our own mobile app, Yidian, do we have a similar -- any similar thinking behind this?

Thanks, Binbin. With respect to our video content strategy, actually, we have been very good at short video because we inherited the DNA from our parent company. We are good at short video clips. But as Shuang mentioned earlier, since the tightening of the policies, we have been very prudent to provide such content. So we are expanding our -- as for Yidian, actually, out of the 51-minute time spent of Yidian's DAU -- of the Yidian's user, most of which have been spent on video, Yidian has been expanding its video content through the self-media, Yidianhao. And actually, it has been very well received because we have combined our self-media account with Yidian. The combined account is Yidianhao and (inaudible) combined -- consolidate together, out of which we have a total of over 88 million distribution of the self-media account. So that provides a very huge distribution channel for the self-media. And also because Yidian have obtained its first Internet news license, so this Yidianhao's platform has become the most preferred platform for content creators, including both personal and institutional accounts, based on the combined platforms competitive age on legitimacy and as well as the distribution ability, as I mentioned earlier. Now for the self-media, we have over 550,000 accounts. It was 5x as compared to when we launched about 5 quarters ago. We are keen to continuing to grow the self-media account to enrich our content. But on the other hand, we are also encouraging our editors to create their own original content. Because we have been very good at producing premium content and serious journalism, so we are encouraging our editors to create original content as to enrich our content library. So this is for our content strategy as for now. And for verticalizations, actually, as you mentioned, other players are diversifying into other verticals. We -- actually, as for our financial verticals, we have been doing very well. It has been ranking #1 on Weixin official -- WeChat's official account. So we actually invest additional time and money, of course, investment on developed this financial verticals, especially we are actually thinking of launching some paid service on a paid basis for to -- with respect to the financial-related topics to the targeted user because all of the users, which are using WeChat official accounts are very, very targeted users, so in order for us to create a very custom-made -- very customized financial-related services to our users. So this is all our verticalization strategies. And as for Yidian's overall video and content strategy, I'll let Shuang to further add some color on it.

Yes. As to the FENG and Yidian's product strategy, actually, we are not in a position to comment other players. But for us, at current stage, our strategy is to focus on our 2 flagship apps. One is ifeng News, the other is Yidian News. These 2 apps lay the solid foundation for our mobile strategy. Ifeng News is more news-driven, targeted at mainstream customers and to deliver -- to achieve the personalized delivery of high-quality, tasteful and premium content. While Yidian is targeting at the broader demographic because 2 of these shareholders are Xiaomi and OPPO, so the demographic is different from ifeng. And also, we try to balance the news and entertainment. It's more technology-driven. From branding point of view, these 2 products are different. FENG is more high end, more mainstream, emphasize on the use of -- on the tasteful and the...

Newsworthy.

Newsworthy information delivery. While Yidian emphasize our useful and interesting information delivery. So the market positioning, the demographic, the approach they are using are complementary to each other. So these 2 apps lay down the solid foundation for our mobile strategy. But of course, we're also monitoring the vertical areas opportunities like (inaudible), in finance area. Also, we're looking at the video area. But our approach will be very prudent. We'll be very careful about the ROI, especially in terms of the acquisition costs. So we'll leverage our brand, our expertise in vertical areas and to combine our online and offline resources to develop the vertical areas. And also our 2 major shareholders -- Yidian's 2 major shareholder, Xiaomi and OPPO, grant us more opportunities to capture broader demographic among handset users. So that's one of the resources that other players cannot have. We'll fully leverage it to further expand our 2 apps' market penetration.

Our next question is coming from the line of [Chen Chou] from CICC.

I'm [Chen Chou] on behalf of Natalie. I just have a very quick follow-up question about the mobile advertising business. Could management draw more color about the breakdown of advertisers categories? And do we see some potential budget shift from specific advertiser categories degree in 2018?

This is Betty. With respect to the advertising revenue, our advertising revenue in Q4 showed a very strong momentum, with net advertising revenue growth of over 16%, mainly driven by the strong growth of our mobile app of over 60% growth. This -- it was mainly because of, firstly, our sales team was becoming more efficient after the reorganization about a year ago. Secondly, our programmatic buying on our own DSP platform has been growing over 100% for the consecutive 2 quarters since its launch in second quarter in 2017, and we continue seeing the strong growth of over 70% in the quarter -- in Q4 2017. Last but not least, Q4 is generally a very strong quarter due to seasonality as most of summits and activities were being held in Q4 every year, thus increase in both the revenues and expenses. Looking ahead for this year, we believe the strong momentum of our ad growth will continue into 2018. We expect we have a double-digit growth of our ad revenue. On the other hand, we are also increasing our TAC (traffic acquisition cost) under a very tight control on ROI. We remain confident that our operating results will be improved as compared to 2017. I hope I answered your questions, Chao?

Yes. And I think it's good, part of my question, yes. So -- but I'm really curious about is there any focus on advertising category in 2018 we're focused on growth?

In 2018, I said that the most driver will be coming from the mobile revenue, out of which, on the mobile platform, mostly are sold by our programmatic buying. We launched our programmatic buying DSP platform about a year ago, which was very successful and showed a very, very strong growth. And also, we are going to launch a new product, it's the programmatic buying app made specifically for SME advertisers to use. So by using this, they actually can obtain a very efficient real-time bidding everywhere, anywhere, which enables a very targeted marketing for them, and also to maximize their own ROI. During 2017, I can see a specific customer, auto-related customer, by using this programmatic buying, they are actually increased by over 200% during the placement period. So we -- this is very helpful to the advertisers.

There are no further question at this time. I would like to hand the conference back to today's presenters. Please continue.

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.

Thank you.

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