Phoenix New Media Limited

Ladies and gentlemen, thank you for standing by and welcome to the Phoenix New Media 2020 first quarter earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, press star 1 on the telephone. I must advise you that today's conference is being recorded. I would like to hand the conference over to our first speaker today, IR Senior Manager, Ting Liu. Thank you. Please go ahead.

Thank you, operator. Welcome to Phoenix New Media First Quarter 2020 Earnings Conference Call. I'm joined here by our Chief Executive Officer, Mr. Shuang Liu, and Chief Financial Officer, Mr. Edward Lu. On today's call, MindMan will first provide a review of the quarter result and then conduct a Q&A session. The First Quarter 2020 financial result and webcast of this conference call are available on our website at ir.taifeng.com. A replay of the call will be available on the website in a few hours. Before we continue, I would like to refer you to our Safe Harbor Statement in our earnings price release, which applies to this call as we will make forwarding statements. Finally, please note that, unless otherwise stated, all figures mentioned during this conference call are in RMB. With that, I would like to turn the call over to Mr. Shuang Liu, our CEO.

Thank you, Ching. Good morning and good evening, everyone. In the first quarter of 2020, the COVID-19 pandemic swept across the globe. As a leader of the new media industry in China, we took the resulting macroeconomic challenges head on. We sharpened our focus on enhancing our core competencies, streamlined our content operations, optimized our operating efficiencies, and explored new business initiatives in a prudent and disciplined manner. Our efforts have resulted in enhanced user loyalty narrowed operating loss, and improved cash positions, thus setting the stage for us to capitalize on the post-pandemic economic recovery resulting growth. First, on the content front, we continued to implement a number of new and innovative features in our flagship news app iPhone to further enhance user engagement. During the quarter, for example, we introduced short-form content and trending topic lists into iPhone's news feeds to allow users to effectively access information. We also further enhance iPhone's user engagement by optimizing our audience voting feature and top comment summaries on the platform. These product advancements led to an increase in the diversification of the news feed consumption scenarios. Our premium coverage of the Coronavirus pandemic, combined with our diversified news feed features, has helped to boost the appeal of our news feeds to users. Consequently, the number of users who opened iPhone push notifications increased by 117% year-over-year and 30% sequentially in the quarter. Moreover, by categorizing news content in terms of relevance and time sensitivity, we upgraded our content distribution system and it further boosted our platform's capacity for major breaking news coverage. Such upgrades to iPhone have enabled us to further increase our user retention rate by 38% year over year. Besides upgrading our news app, we remain committed to providing high quality and differentiated content, leveraging our team of leading media professionals we produced a substantial amount of premium news coverage on the COVID-19 outbreak. For example, one article we produced about the struggle of an ordinary family in the death of the coronavirus epidemic received over 530 million views online. The report helped to secure crucial support for the family during their darkest hour. Overall, our focus on advocating for the lives of ordinary people in Wuhan during the outbreak successfully raised public awareness and channeled aid to more people in a timely manner. Such achievements, again, reflected our substantial coverage capabilities for major social events as well as our powerful media influence. Our information news content also received public recognition as a force for the greater social good. In honor of our contribution to society, the State Information Center ranked us among the top 10 online media outlets, providing the most social value. This endorsement is further evidence of our journalistic expertise, striking brand influence, and leading content capabilities. Beyond the news coverage front, we worked tirelessly to produce informative and in-depth to better inform the public. During the coronavirus outbreak, for example, our finance team produced a series of detailed reports depicting entrepreneurs' heroic battle to overcome the pandemic challenges. These pieces struck a chord throughout society, generating more than 13 million views on social media and fostering widespread support in China. We also produced a series of reports titled Frontline, which portrayed the heroic efforts of Chinese healthcare workers and ordinary people from all walks of life fighting against the pandemic on the front line. The series also documented the real-life experiences of those overseas Chinese coping with the stress and uncertainties of state-at-home orders and provides advice to the public about COVID-19 medical treatments. Frontlines achieved outstanding operating metrics, with 16 of its articles collecting over 17 million views across the social media. Moreover, in our fashion vertical, we organized a campaign featuring over 100 celebrity voices recording to boost public morale, accumulating more than 40 million views and 60,000 interactions on social media. in the face of the coronavirus epidemic. Against the backdrop of unprecedented macro uncertainties and market challenges, our ability to control our costs and preserve an ample cash reserve has become essential to the long-term growth of our company. Consequently, we have made a number of proactive adjustments to bolster our operating performances. We have refocused our current growth strategy onto the reduction of user churn rate and improvement of user retention rate. We are also actively avoiding inefficient user acquisition methods, as we firmly believe that such tactics would jeopardize our user base quality and monetization efficiency. Despite a reduction in our marketing expenditures as we pulled out inefficient user acquisition channels, we enhanced existing user satisfaction and engagement, and improve new user attraction by leveraging our high-quality content and premium user experiences. As the epidemic accelerates the migration of commerce from offline to online and shifts internet marketing closer to the point of transaction, we have made a decisive push to capitalize on emerging growth opportunities in e-commerce. In the real estate vertical, for example, we launched an innovative shopper payment marketing campaign. This creative model integrated property sales into celebrity live streaming content, which successfully fulfilled the marketing needs of our real estate clients. By partnering with the top celebrity and R&F group, Fuli Group, one of the largest scale real estate companies in China, The campaign became an instant smash hit, attracting over 10 million viewers to our platform and approximately 20 million across the internet. Additionally, during the first quarter, to cater to the increasing number of users who wish to attend highly sought-after product launches virtually through webcasts, we created a new format for our super product launch conference and upgraded the live broadcast platform Despite increased competition from video and live streaming e-commerce platforms, our potent brand influence and meticulous product curation have heightened our platform's competitive advantages in the marketplace. Completing the final link in the transaction value chain for advertisers, our platform has unleashed the power of our closed-loop marketing system. For our new business initiatives, we continue to make steady progress in the monetization of our comic book and online real estate business in the first quarter. On the comic book front, our highly acclaimed theorist Love Chucky and A Deal is a Deal maintain their outstanding performances, collecting 124 million and 108 million online views by the end of this quarter, respectively. Furthermore, we formed a strategic partnership with international publishers to export two of our own popular comic book series into the Korean market. In addition to being a win-win deal for both parties, these partnerships will serve as valuable experience for us as we continue to explore more IP initiatives in the comic book industry going forward. Notably, for online real estate, We have further improved the profitability of this business segment through effective project management and cost control measures, despite the fact that real estate developers are becoming increasingly cautious about their advertising budgets in response to the coronavirus outbreak. We are also collaborating with real estate developers to help them better generate high-quality sales leads through the active exploration of new marketing models, including offline to online, live broadcast, and more. Real estate developers continue to show interest in such initiatives, in such innovation solutions. And we are optimistic about their growth potential. In summary, we are constantly facing challenges in advancing our advertising business and expanding our user base. Since the worldwide pandemic, has caused severe disruption to the entire advertising industry. Nevertheless, in spite of these near-term headwinds, we aim to continue enhancing our content capabilities and content distribution process to further refine our operating efficiency. The resiliency and strength of a proven business model, as well as our compelling broad influence, will also enable us to explore potential growth drivers in new fields in business. In light of the current market environment, we expect the epidemic to impact our business segments in the short term. However, our consistent delivery of premium news content and elevated brand influence will help us mitigate these challenges and minimize our exposure to the increasing macro uncertainties. With that, I'll turn the call to Edward, our CFO, to go through the financial results.

Thank you, Sean, and thank you all for joining our conference call today. Our total revenues in the first quarter of 2020 were RMB 274.8 million, which beat the high end of our previous guidance and represents a slight decrease of 3.5% from RMB 284.9 million. in the same period of last year. Total revenues in the quarter included RMB 59.5 million of consolidated revenues from Tianbo. Excluding the revenue contribution from Tianbo, total revenues in the first quarter of 2020 decreased by 24.4% year over year due to the negative impact of COVID-19 outbreak and the intensified industry competitions. I will now provide some additional color on our revenues in the first quarter of 2020. Consolidated net advertising revenues in the first quarter of 2020 were RMB 227.9 million, representing an increase of 5.5% from RMB 216 million in the same period of last year. This increase was primarily attributable to the consolidation of advertising revenues from Tianguo Excluding the revenue contribution from Tianbo, net advertising revenues in the first quarter of 2020 decreased by 20.9% year-over-year. Paid services revenues in the first quarter of 2020 decreased by 31.9% to RMB 46.9 million from RMB 68.9 million in the same period of last year. Revenues from paid content in the first quarter of 2020 decreased by 32% to RMB 36 million from RMB 52.9 million in the same period of last year. Mainly due to the market conditions as well as the tightening of rules and regulations on digital reading, Loss from operations in the first quarter of 2020 was RMB 116 million compared to RMB 122.1 million in the same period of last year. Operating margin in the first quarter of 2020 was negative 42.2% compared to negative 42.9% in the same period of last year. Non-GAAP loss from operations in the first quarter of 2020 was RMB 71.7 million compared to RMB 118.1 million in the same period of last year. Non-GAAP operating margin in the first quarter of 2020 was negative 26.1% compared to negative 41.5% in the same period of last year. Net loss attributable to fixed-emitter limited in the first quarter of 2020 was RMB 79.5 million compared to RMB 119.7 million in the same period of last year. Non-GAAP net loss attributable to Fins New Media Limited in the first quarter of 2020 was RMB 49.7 million compared to RMB 111.8 million in the same period of last year. Moving on to our balance sheet, As of March 31, 2020, the company's cash and cash equivalents, term deposits, short-term investments, and restricted cash, or RMB $1.48 billion, or approximately US$209.4 billion. Finally, I'd like to provide our business outlook for the second quarter of 2020. We are forecasting total revenues to be between RMB 308.7 million and RMB 338.7 million, representing a decrease of 14.3% to 21.9% year-over-year. For net advertising revenues, we are forecasting between RMB 276.4 million and RMB 291.4 million, representing a decrease of 10.3% to 14.9% year-over-year. For paid service revenues, we are forecasting between RMB 32.3 million and RMB 47.3 million, representing a decrease of 32.8% to 34.1% year over year. As we walk through the impact of the pandemic, our long-term strategy of maintaining a strong balance sheet with no debt and ample liquidity continues to serve as a significant advantage Beyond our current reserve of cash, which is quite healthy, we also expect to receive the second tranche of our EDN transaction payment. This cash injection will allow us to tap into new growth opportunities in attractive markets and industry verticals. At the same time, we also plan to maintain our focus on the refinement of our cost structures to further bolster our operating efficiency. Therefore, we are successfully reducing traffic acquisition costs in the quarter by almost 50% on a year-over-year basis. Going forward, the combination of our stringent cost control measures and healthy cash position will enable us to overcome the challenges in the current market environment, seize the opportunity to develop during the post-pandemic economic recovery, and consolidate our leadership in China's new media industry for years to come. This concludes the prepared portion of our call. We are now ready for questions. Operator, please go ahead.

Thank you, Edward. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and with your name to be announced. If you wish to cancel a request, please press the pound or hash key. The first question comes from Binbin Ding from JP Morgan. Please ask a question.

Good morning, management. Thanks for taking my question. My first question is regarding the COVID-19 impact. So, management shared some color regarding the impact on the overall online advertising sector and your own business performance. And if possible, could you elaborate some details on the impact by major advertiser industries such as FMCG internet services, et cetera, as well as the impact on brand ads versus performance ads. My second question is, it seems the situation is largely under control and economic activity is gradually back to normal since April. So how does advertiser sentiment and feedback towards such a recovery? Are they generally remaining very cautious on the spending or are they actually planning to scale up their spending in the coming month? Thank you.

Thank you, Bingbing. This is Shuang. I will answer the first part to address your concern about the funding of the business. And later on, Edward will take on the advertising and performance ad and also the industry segments. During the outbreak, I think looking back, our editorial team performed very well. Thanks to their efforts, we have achieved significant improvement in the operating metrics of our news app. As the number of users opening iPhone push notifications increased by, as I mentioned in my opening remarks probably, by 117% year over year. and its user retention rate grew by 38% year-over-year. Even though the epidemic put our operating capabilities to the test, our content protection team outperformed expectations. During the quarter, our team created a series of high-quality original content programs that resonated with the broad demographic online, such as Tumor Intelligence Agency, Zhongliu情报局, Tang Bo Hu, and our popular We Media account called Living. These successfully capture the hearts and minds of the public with its top reports. It totally generates over 530 million views in total. So this epidemic actually boosts our brand influence and increase our user loyalties and lay down a solid foundation for our future user expansion and also to win more advertising endorsements. Edward can, yeah, he'll have more on.

Morning, this is Edward speaking. In terms of the online advertising industry, I think it's still under severe pressure However, it has started to recover in the second quarter. From an industry perspective, advertisers in the liquor and auto sectors, among others, were negatively impacted in China. For example, based on data from the China Association of Automobile Manufacturers, car sales in March dropped by 48% year over year. However, we also observed a significant increase in app spending from advertisers in areas such as online gaming and education industries. Recognizing this trend, we will continue our investments to acquire new advertising clients in various industries to build a more diverse client base. We believe as China continues to recover from the epidemic, Brand advertising and performance-based advertising will also recover. On a sequential basis, we believe brand advertising will recover faster because SMEs will face a bigger battle for survival, and brand advertisers continue to assess the progression of the outbreak. In other words, the brand advertisers are still cautious in Q2. We are actively developing new strategies to adapt to the online advertising industry in the post-pandemic period. First, as I mentioned earlier, we will optimize our sales team to focus our efforts on acquiring advertising clients in the online education and gaming industries, etc. Second, we are leveraging our technology capabilities to transition offline events online. For example, the Finance Virtual Summit we organized in May is a good example of this initiative. Third, in addition to fulfilling the branding needs of our clients, we need to help our clients articulate their value propositions and enable them to sell their products at a premium. The marketing campaign that our real estate channel in April is an excellent example of how we utilize our live streaming service to facilitate online conversions for our clients. I hope I have answered your question, Bimbi.

It does. Thanks very much. Thank you.

Thank you, Bimbi. Thank you.

The next question comes from Frank Chen from Macquarie. Please ask a question.

Good morning, management. Thanks for taking my question. I have only one question on the cost side. I see you achieved impressive, you had an impressive achievement on cost control in the first quarter. Could management elaborate more on the results and on the measures, on the cost control measures in the first quarter? And given the uncertainty caused by the COVID-19, has the company changed the full-year operating target? That's my question.

Hello, Frank. This is Edward speaking. Actually, during the quarter, Successful implementation of our cost control initiatives allowed us to reduce our cost by about 30% year-over-year. The reduction is a testament of our efforts in a few areas. First, we are increasingly selective on acquiring copyright content from third-party sources, which not only led to an over 30% year-over-year drop in our content cost, but also improved our content quality. Secondly, we started optimizing our organizational structure at the end of last year. The optimization enabled us to improve our operating efficiency while executing our growth plans. As a result, we reduced the staff cost of iPhone in the first quarter by 19% year over year. Certainly, we adopted a more prudent and systematic approach in our user acquisition management process, which enabled us to cut about half of our traffic acquisition costs in the first quarter. While the uncertainties caused by the pandemic have created serious challenges for the entire industry, we believe that effective corporate governance will allow us to continuously optimize our cost structures while ensuring ample cash flows and healthy revenue growth. Our target for 2020 is to drastically reduce our losses, and our ultimate goal will always be securing the long-term growth prospects of our company and delivering sustained value to our shareholders.

Thank you, Edward.

Thank you, Frank. The next question comes from Kamen Zhang from First Shanghai. Please ask a question.

Hi, management. Thanks for taking my question. Could you share more on the company's video development strategy? How do you plan to respond to the rapid growth of short-form video and live streaming players?

Thank you, Cameron. This is Shuang. You raised a lot of questions. First of all, original IP content, particularly culture interviews, has always been the cornerstone of our company. Many of our in-house productions, such as Endless Power, Huo Li Wu Xian, She De Wisdom Lectures, She De Zhi Hui Jiang Tang, and Alliance of Heroes, China Sports Hero Alliance, have received widespread viewers recognition, and advertiser endorsements. In 2020, we will continue to deliver premium content, original content, that complements our brand by leveraging the leading capabilities of our professional's IP content production team. The outbreak of COVID-19 in the first quarter of 2020 has delayed some of our content production arrangements. But we still launched several blockbuster series that were very well received by both our users and advertisers. And that's about our original IP content. The second part, we have long established our foothold in the live streaming space with phone life. The live streaming service has been vital in providing our users with real-time coverage from large-scale summits and current affairs in the past. Building on its previous success, we have continued to upgrade PhoneLive, enabling it to play a significant role in keeping our users informed throughout the pandemic. In the last couple of months, for example, PhoneLive served as an essential online portal for users to follow finance virtual summit that we organized in May. In the summit, we invited many distinguished speakers to share insights on the global economy, including Mr. Cui Tiankai, the Chinese ambassador to the United States, and Mr. Stephen Schwarzman, chairman of BlackRock Group. Well, the event once again highlighted our leading brand influence from life, also became a benchmark of how live streaming service can be utilized to generate professional coverage of large-scale events. In addition, we integrated e-commerce features into PhoneLive's platform, complementing the monetization process in April. We launched a celebrity property sale live streaming campaign in our real estate channel. The campaign delivered encouraging results, generating better than expected sales for our real estate clients. And thirdly, we fully recognize the immense potential of short-form video, which is an integral part, integral component of our growth strategies. Leveraging short-form videos, our news coverage will be more engaging and relevant to our viewers. Right now, we are also actively exploring distribution channels for our original short-form video content across the Internet. Since this content is more appealing to younger users, we believe that short-form video will perfectly complement our existing content library and further enhance our user experience. So in the pan-entertainment era, our extensive experience in video operations, our pervasive brand, and our commitment to producing high-quality, aspiring, and humanism IP content will set us apart from the competition. Going forward, we'll definitely continue to upgrade. Fun life. and explore additional monetization opportunities on its platform. Yeah, this is our overall video game plan. Thank you, Carmen.

Thanks. Once again, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. Once again, if you wish to ask a question, please press star 1 on your telephone and make your name to bin. I would now like to hand the conference back to management. 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 all. Thank you. Ladies and gentlemen, we have reached the end of our conference call. Thank you for participating. You may all disconnect.