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Phoenix New Media Limited (NYSE:FENG)
Q4 2019 Earnings Call
Mar 25, 2020, 9:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to Phoenix New Media 2019 Fourth Quarter and Fiscal Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Ms. Qing Liu. Director of Investor Relations. Thank you. Please go ahead.

Qing Liu -- Director of Investor Relations

Thank you, operator. Welcome to Phoenix New Media Fourth Quarter 2019 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, management will first provide a review of the quarterly results and then conduct a Q&A session. The fourth quarter 2019 financial results and webcast of this conference call are available on our website at ir.ifeng.com. A replay of the call will be available on the website in a few hours. Before we continue, I would like to refer you to our safe harbor statements in our earnings press release which apply to this call as we will make forward-looking statements. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB.

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

Shuang Liu -- Chief Executive Officer of Phoenix New Media, Chairman of the Board of Yidian Zixun

Thank you, Qing. Good morning and good evening everyone. In the fourth quarter of 2019, our unique position as a new media pioneer has enabled us to consistently outperform the competition as evidenced by our better-than-expected top-line performance in the fourth quarter of 2019. Additionally, our ongoing production of engaging exclusive new content, brand-enhancing activities and monetization stream diversification continue to boost our value proposition with both users and advertisers alike. On the news front, we are focused heavily on balanced accurate coverage of major social events around the world, such as Hong Kong protest [Phonetic] and US-China trade negotiations.

During the US-China trade negotiations, for example, we leverage our comprehensive news coverage, unique editorial perspectives and state-of-the-art recommendation algorithms to keep users up-to-date throughout the twist and turns of events. In particular, our coverage of this event was well received by our users, achieving 15.3 million views in total. The warm reception of users to this type of content helped us to grow our click-through rate by 8% year-over-year in the fourth quarter.

We also achieved improvements in other operating metrics, including user conversion rate, retention rate and user time spent on our flagship news app, ifeng. Notably, our consistent coverage of these high-profile social events continues to boost both our market leadership and brand influence in China's new media industry.

In addition to premium news coverage, we also continued to enhance our brand influence and solidify our leadership in key content verticals through off-line events during the quarter. For example, in December, we organized our ifeng Fashion Award Gala in Beijing. With the participation of multiple top-tier celebrities and fashion KOLs, this eye-catching event attracted 860 million total views and resulted in seven of the highest-ranked search topics on social media.

In November, we held our Annual ifeng Finance Summit in Shanghai. Our content teams utilized this event to produce a number of extensive reports and reached millions of users online. Additionally, in November, we hosted the 2019 ifeng Beautiful Childhood Charity Gala in cooperation with China Charities Aid Foundation for Children and several other charity organizations to raise over RMB32.4 million in donation for children in need. During the last 13 years, we have organized the Annual ifeng Beautiful Childhood Charity Gala in eight different cities across three continents to raise over RMB210 million. Importantly, our ability to leverage these events to provide engaging content to users and deliver convincing results to advertisers highlights the strong multi-dimensional value proposition.

In light of these advantages, we expect our event execution capabilities to continue driving our business expansion going forward. For online reading, we continue to explore those opportunities with attractive monetization potential. During the fourth quarter, we produced over 200 audio books; three of which instantly become smash hits on popular audio platforms through China. In addition, our comic book business also continued to produce encouraging results. In October, for example, we launched a new 10-episode anime series that performed exceptionally well, collecting over 160 million views in less than three months. Going forward, we plan to replicate this success formula and produce foreign language comic books in English, Korean and other languages for more readers around the world.

On the gaming front, the State Administration of Press and Publication issued a gaming license to God Slayer [Phonetic] on February 10. God Slayer is a highly anticipated game title produced by our subsidiary in 2019. We are convinced that our commitment to developing creative IP and new channels of monetization will enable us to continue growing our traffic and diversify our revenue stream in the long run.

By the end of 2019, we had cash and cash equivalents of around $243 million, and we are expecting to receive about $200 million from the second payment tranche of our Yidian transaction. On acquisition front, while we remain certain of our ability to identify suitable acquisition targets and capitalize on these opportunities, we will continue to exercise a prudent approach to due diligence in order to maximize our upside potential. With abundant cash reserves, healthy cash flows and systematic strategic investments, we firmly believe in the strength of our long-term growth prospects.

Looking back on 2019, we experienced the challenges of involving media regulations and macroeconomic headwinds. However, despite these obstacles, we continue to enhance user stickiness by enriching our content library, bolster our brand influence in key content verticals and explore additional monetization opportunities.

As we advance into 2020, we are facing unprecedented challenges from one of the most devastating epidemics of our era, the coronavirus outbreak. We always pride ourselves on our ability to deliver premium reporting to our audience. In response, we have once again set ourselves apart from our media and Internet portal peers by launching various reporting initiatives to lead the outbreak coverages. At the onset, we launched the first-ever domestic as well as international epidemic map to track the spread of the virus in real time, document confirmed cases and categorize cases by chronology and geography.

We also created the first special media cloud dedicated to fact-checking and debunking outbreak rumors while producing daily briefings on the latest outbreak trends to keep our users informed. Furthermore, we led the first Internetwide campaign to fight the surge of resentment and discrimination toward those at outbreak's epicenter in Wuhan, successfully promoting a thorough understanding of the situation.

To heighten public awareness, we leverage our ability to process, analyze and deliver informative and engaging new content. Since January 19, our we-media account, Human Intelligence Agency [Phonetic] [Foreign Speech] has issued over 30 in-depth analysis pieces on outbreak's development, helping to educate the public on origin and transmission mechanism of the virus while demystifying outbreak rumors. The exclusive coverage of our we-media account, Tang Bo Hu [Phonetic], has also received industrywide recognition, collecting over 14 million views on our platform and producing multiple articles that have topped the charts of other social media platforms. Additionally, we published a number of pieces on ordinary Chinese citizens bravely battling against the disease to maintain a sense of normality in the lives of popular we-media accounts, [Indecipherable]. These stories received 5 million views on our platforms, with the most popular collecting 150 million views across the Internet. Notably, our success in these initiatives continue to illustrate our competitive advantages in professional reporting talent, powerful brand influence and a global journalist team, which is second to none.

For our internal operations, we immediately acted to protect the health and well-being of our employees and maintain efficient daily operations. Moreover, in line with our commitment to social responsibility, we provided additional forms of aid beyond our premium news coverage. For example, we were part of the first batch of Internet companies to donate RMB1 million to the China Charity Federation in support of those medical workers on the frontline of the outbreak. We are also among the early donors of education equipment to help students in less-developed areas across online learning courses. To better facilitate the public access to medical assistance, we established a platform to provide counseling services to those in need of mental health work and an online registry for those who suspect that they may be infected and are under self-imposed quarantine.

Our response to the outbreak has not only received a positive reception from the public, that has also helped to further augment our brand influence and credibility. To date, we have remained at the forefront of the domestic media industry in terms of breaking news and quality of content. Going forward, we'll continue to focus on providing our audience with the premium news coverage that it requires in such times of crisis.

In the coming quarter, we believe that most domestic companies will inevitably be forced to reevaluate their marketing strategies and revise their advertising budgets. Such a shift will negatively impact our advertising revenues in the near term. However, as I have mentioned, our ability to generate highly relevant sales leads will remain attractive to those advertisers while focused on maximizing their ad ROI while operating under budgetary constraints. Therefore, 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 to ensure the growth prospects of our advertisement business in the long term.

With that, I will turn the call to Edward, our CFO, to go through the financial details.

Edward Lu -- Chief Financial Officer of Phoenix New Media

Thank you, Shuang, and thank you all for joining our conference call today. I hope everyone is well and healthy. Our total revenues in the fourth quarter of 2019 were RMB470.9 million, representing an increase of 17.9% from RMB399.2 million in the same period last year. Our total revenues this quarter included RMB70.5 million of consolidated revenues from Tadu and RMB83.4 million of consolidated revenues from Tianbo.

I will now provide the details on our revenues in the fourth quarter of 2019. Consolidated net advertising revenues in the fourth quarter of 2019 were RMB395.2 million, representing an increase of 11% from RMB355.9 million in the same period last year. The increase was primarily attributable to the consolidation of advertising revenues from Tianbo and Tadu. Net advertising revenues from our traditional business in the fourth quarter of 2019 decreased by 20.7% due to increasing macroeconomic uncertainties and the heightened industry competition.

Paid services revenues in the fourth quarter of 2019 increased by 75.1% to RMB75.7 million from RMB43.3 million in the same period last year. Revenues from paid content in the fourth quarter of 2019 increased by 172.2% to RMB59.2 million from RMB21.8 million in the same period last year, mainly due to the consolidation of digital reading revenues from Tadu.

Loss from operations in the fourth quarter of 2019 was RMB93.5 million compared to RMB39.0 million in the same period last year. The increase in loss from operations was mainly due to the more increase in cost of revenues and operating expenses than in revenues. Operating margin in the fourth quarter of 2019 was negative 19.9% compared to negative 9.8% in the same period last year.

Non-GAAP loss from operations in the fourth quarter of 2019 was RMB86.8 million compared to RMB34.4 million in the same period last year. Non-GAAP operating margin in the fourth quarter of 2019 was negative 18.4% compared to negative 8.6% in the same period last year.

Net income attributable to Phoenix New Media Limited in the fourth quarter of 2019 was RMB911.8 million compared to a net loss attributable to Phoenix New Media Limited of RMB38.3 million in the same period last year. Non-GAAP net loss attributable to the company in the fourth quarter of 2019 was RMB82.7 million compared to RMB37.7 million in the same period last year.

Moving on to our balance sheet. As of December 31st, 2019, the company's cash and cash equivalents, term deposits, short-term investments and restricted cash were RMB1.7 billion or approximately $243.6 million, which included RMB30.1 million from Tadu and RMB109.7 million from Tianbo.

Let me briefly run through the key figures in fiscal year 2019. Total revenues in 2019 increased by 11.2% to RMB1.53 billion from RMB1.38 billion in 2018. Net advertising revenues in 2019 increased by 5.4% to RMB1.26 billion from RMB1.20 billion in 2018, primarily due to the consolidation of advertising revenues from Tianbo and Tadu. The company's net advertising revenues from traditional business decreased by 20.4% from 2018 to 2019 due to the same factors that led to the quarterly decrease. Paid services revenues in 2019 increased by 49.4% to RMB267.6 million from RMB179.1 million in 2018, primarily attributable to the consolidation of digital reading revenues from Tadu.

Non-GAAP loss from operations in 2019 was RMB347.3 million compared to a non-GAAP loss from operations of RMB110 million in 2018. Non-GAAP operating margin in 2019 was negative 22.7% compared to negative 8% in 2018.

Non-GAAP net margin in 2019 was negative 20.4% compared to negative 4% in 2018. Non-GAAP net loss attributable to the company in 2019 was RMB311.7 million or a non-GAAP net loss of RMB4.28 per diluted ADS.

Finally, I'd like to provide our business outlook for the first quarter of 2020. We are forecasting total revenues to be between RMB252.8 million and RMB272.8 million, representing a decrease of 4.2% to 11.3% year-over-year. For net advertising revenues, we are forecasting between RMB211.8 million and RMB226.8 million, representing a decrease of 1.9% to an increase of 5% year-over-year. For paid service revenues, we are forecasting between RMB41.0 million and RMB46.0 million, representing a decrease of 33.3% to 40.5% year-over-year.

As Shuang mentioned earlier, the coronavirus outbreak is disrupting our operations and affecting our advertising clients' budgets in the short term. However, as we continue to bolster our market position by upgrading our content and enhancing our brand influence, we remain on track to achieve our long-term financial targets. Moreover, while we continue to invest in growing our revenues, we are also monitoring on our investment returns. Importantly, going forward, we will remain committed to the refinement of our operating efficiency and optimization of our cost structure. This prudent approach will further improve our investment returns as we expand our distribution channels and execute new business development projects. More importantly, as a result of the cost control initiatives that we have implemented and our consistent streams of revenue, we have built up abundant supply of cash reserves to sustain our growth during this challenging time. The combination of our prudent investment approach and the strong capital position will help us to weather the current market headwinds, return to profitability and improve our positioning to better seize market opportunities going forward.

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

Questions and Answers:

Operator

Certainly. [Operator Instructions] Your first question comes from the line of Frank Chen. Please ask your question.

Frank Chen -- Macquarie Group Limited -- Analyst

Hello Shuang, Edward, Qing. Hope everyone is healthy. I have a question on the loss margin in 2020. I remember last time you were talking about that you lowered the loss line by 50% in 2020. Given current situation, can you give us some update on your target? How should we think of the loss -- on the loss margin in 2020? Thank you.

Shuang Liu -- Chief Executive Officer of Phoenix New Media, Chairman of the Board of Yidian Zixun

Yes, hi, this is Shuang. I'd like to answer your question. Maybe Edward can add a few more words. We believe we can significantly narrow our loss in 2020. First, at the end of 2019, we thoroughly refined our organization structure. And also, since the start of 2020, we also systematically optimized our content costs and traffic acquisition costs. To control our content costs, we review all the contracts with our content providers more carefully before signing it so that we can maximize our return on investment of all copyright content.

To control our channel costs, we have taken into consideration both the current market environment and user growth strategies, implemented [Technical Issues] cost control measures and limited our spending into those channels with less-efficient traffic acquisition.

Moreover, since the outbreak, our operating metrics have improved substantially. As a result, our conviction toward maintaining our professional journalism and augmenting our brand influence is further strengthened. As these core competencies enable us to attract those users with profiles desired by our advertising clients, we believe we're able to improve our profitability in an efficient manner. So we remain confident in our ability to narrow losses substantially in 2020. Yes.

Frank Chen -- Macquarie Group Limited -- Analyst

Thank you.

Shuang Liu -- Chief Executive Officer of Phoenix New Media, Chairman of the Board of Yidian Zixun

Thank you.

Operator

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

Carmen Zhang -- First Shanghai Securities -- Analyst

Hi management. Thanks for taking my question. My question is about the recent coronavirus outbreak. Could management share your thoughts on how the outbreak may impact your business?

Shuang Liu -- Chief Executive Officer of Phoenix New Media, Chairman of the Board of Yidian Zixun

This is Liu Shuang. Yes, I will tackle the question first. And maybe later, Edward can cover the impact on our advertising business and other related business. Since the early stage of the coronavirus outbreak, our editorial team has provided comprehensive and in-depth coverage of epidemic. Our reporting performance has, in turn, significantly enhanced our operating metrics, including DAU retention rate and click-through rate on ifeng news app. In addition, our well-received news coverage also helped us further enhance our brand reputation. So this outbreak provided us with an opportunity to further strengthen our brand influence and improve our traffic. We also led the outbreak coverage rates by leveraging Phoenix Satellite Television news reporting resources, providing original video programs, producing in-depth expert opinions and distributing real-time epidemic data. Beyond our news coverage, we also provided various type of aids to support those affected by the coronavirus, including -- as I mentioned in my opening remarks, including the donation of cash and medical supplies to Hubei province. We initiated several influential social campaigns, for example. We established China's first online registry for coronavirus patients, offered tablets to children in poverty so they can access online classes, and published an encyclopedia of protective matters in collaboration with Providence Academy for overseas Chinese students. These initiatives not only provided tangible support to those affected by the epidemic but also enhanced our brand reputation, which will improve our brand advertising sales in the future.

Based on these -- our recent practice, the industry-leading quality of our news coverage has attracted many new users to our platform with a healthy level of click-through rate and user time spent. So going forward, we -- I think we will continue to focus on the needs of those core users as we optimize our content ecosystem and AI-powered content distribution system.

So with this strategic focus in mind, we have -- we evaluated our user acquisition strategy as well. We think when we examined the ROIs of those users acquired through our investment in marketing channels, we figured out that their level of stickiness and engagement as well as their contribution to our ad inventory still has quite a bit of room to optimize. So we believe that in 2020, our traffic acquisition cost should be reduced by at least 50% as we improve our user acquisition efficiencies. So this epidemic also let us realize that we need to reevaluate and adopt new user growth strategy to optimize our user experience.

While we are expecting user traffic to gradually return to normal levels after the epidemic, the outstanding quality of our news coverage during the outbreak has allowed us to further enhance our user stickiness and brand influence. These improvements will remain attractive for our brand advertising clients after epidemic is contained. Edward probably could add more words on advertising and other business.

Edward Lu -- Chief Financial Officer of Phoenix New Media

Thank you Shuang. Good morning Carmen. This is Edward speaking. I'd like [Technical Issues] about the impact of coronavirus [Phonetic] outbreak on our advertising business. Actually, the competition in online advertising market has become increasingly fierce in recent years. Top short-form video platforms are gaining an increasing amount of market share and user time spent. As people have spent more time online throughout the coronavirus outbreak, we have observed an increase in the overall supply of advertising inventory. However, at the same time, the epidemic is impacting advertisers' business as well and causing them to be more conservative about their ad placement and marketing spending.

From our perspective, the combination of these factors has created a downward pressure on the pricing of our advertisement for sure, especially on the eCPM of performance-based ads from SMEs. During the outbreak, our excellent reporting of the epidemic has resulted in significant increase in user traffic. This improvement enabled us to effectively increase our advertising inventory and sales. However, in general, the overall advertising environment will create a serious challenge for our advertising business in 2020, especially on the brand advertising sales side.

Take the auto industry as an example. Due to the impact of the epidemic, consumer demand for cars has dropped significantly. According to recent data released by the China Association of Automobile Manufacturers, auto sales in the first two months of 2020 decreased by 42% in comparison to the same period of 2019. As a result of this, carmakers in China will be forced to either reduce their marketing budgets or delay their marketing plan. However, it's expected that the [Technical Issues] market will start to recover in the second quarter of 2020, and the manufacturers will also begin to gradually increase their marketing spending.

Another area worth mentioning is e-commerce. [Technical Issues] severely impacted by the outbreak. The e-commerce sector enjoyed a 3% year-over-year increase in sales during the first two months of 2020. Generally speaking, since the people avoided going outside during this period, the epidemic accelerated the shift of consumption habits from offline to online; actually benefited the e-commerce industry. So we expect a significant increase in total e-commerce spending for the full year of 2020. Our reporting of the epidemic has led to a surge in our loyal user base and in our ad inventory. As a result, we should be able to better serve our e-commerce advertisers going forward.

Overall, I think the epidemic has created a challenge for our advertising sales. In response, we have also implemented a few measures for our advertising business. For example, we have been shifting some offline events to online as the surge in our traffic should give our advertiser better brand exposure and a higher sales conversion rate. [Technical Issues] expanding into new verticals, such as study abroad and online education to further diversify our client base, although we are facing the short-term headwinds on our advertising business. Our brand influence and the public recognition to our in-depth news coverage will bolster our growth in the long term [Technical Issues].

Moreover, on our gaming business, our subsidiary, Miaoqiu, has completed the development of the God Slayer. On February 10th, this game title received its gaming license from the State Administration of Press and Publication. We are currently working closely with leading game producers in China to distribute and launch the game in April. We will, for sure, update everyone on our progress in these areas in a timely manner going forward. I hope that answered your question, Carmen.

Carmen Zhang -- First Shanghai Securities -- Analyst

Yes, thanks. It's very helpful.

Operator

Your next question comes from the line of Binbin Ding. Please ask your question.

Binbin Ding -- JPMorgan Chase & Co. -- Analyst

Good morning management. Thanks for taking my question. I wish everyone stay healthy and safe. I have a high-level question on your strategy in 2020. So I think the overall media space in China has become very dynamic and competitive in the past two years. Can you share some colors in terms of your top business priorities in 2020? And with your focus increasingly shifted to content production, how do you balance Phoenix position as a more traditional media platform offering new services versus our new role as a content producer providing more enriched content, such as literature, video content, etc.?

Secondly, can you quickly update us your investment strategy in 2020 given you have a lot of cash on the balance sheet? Thank you.

Shuang Liu -- Chief Executive Officer of Phoenix New Media, Chairman of the Board of Yidian Zixun

Hi, Binbin, this is Shuang. To answer your question, our first operational challenge this year is to significantly reduce our operating loss. As I mentioned in my previous remark, we are very confident that after adopting the new user growth strategy, we're going to seriously cut our marketing budget and become more focused on core users, further optimize our user experience so that the loss will be reduced significantly. That's our top operational challenge, and we're confident that we can tackle that challenge.

And as to the content strategy, well, we -- as you guys witnessed in this coronavirus outbreak, we stayed at the forefront of covering of the coronavirus. We're very proud of our breaking news coverage, our high-quality professional analysis, our offline charity events and campaign and also the very touchy-feely video program targeting people affected by this virus. So we're going to continue to stick to our core strategy as a top content player, especially in the news and news-related areas because I think in this era of uncertainties, there are high demand for independent, quality and professional news coverage of the major events, that provide us unprecedented opportunity to better serve our users to improve our traffic.

And also, unlike other players, we have Phoenix TV backing us. We can leverage their reached reporting network all over the world and their [Phonetic] top-notched documentaries to enrich our users' experience. As to investment and growth strategy, we'll continue to explore new growth drivers, both organically and through acquisitions. Notably, by combining our operational experience and industry expertise, we have developed a systematic approach to evaluating strategic investment opportunities. Our current priority is to evaluate acquisition targets with attractive valuations, strong synergistic capabilities and the potential to expand our footprint in such sectors as healthcare, finance and urban lifestyle.

More importantly, in response to the increasing uncertainties brought on by the pandemic, we have also adopted a more cautious approach to our strategic investment and M&A strategy. We believe that we have the right game play in place to accelerate the development of our new business while mitigating potential risk factors to ensure long-term returns for our investors. So as soon as any meaningful progress is made on this front, we'll be sure to update everyone, Binbin. Thank you.

Binbin Ding -- JPMorgan Chase & Co. -- Analyst

Thank you for the color Shuang Liu.

Operator

[Operator Instructions] There's no more question at this time. I would now like to hand the conference back to today's speakers. Please continue.

Qing Liu -- Director of Investor Relations

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.

Shuang Liu -- Chief Executive Officer of Phoenix New Media, Chairman of the Board of Yidian Zixun

Thank you. Thank you, everybody.

Operator

[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

Qing Liu -- Director of Investor Relations

Shuang Liu -- Chief Executive Officer of Phoenix New Media, Chairman of the Board of Yidian Zixun

Edward Lu -- Chief Financial Officer of Phoenix New Media

Frank Chen -- Macquarie Group Limited -- Analyst

Carmen Zhang -- First Shanghai Securities -- Analyst

Binbin Ding -- JPMorgan Chase & Co. -- Analyst

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