Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Phoenix New Media Ltd (NYSE:FENG)
Q2 2020 Earnings Call
Aug 19, 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 the Phoenix New Media Second Quarter 2020 Earnings Call. [Operator Instructions] I must advise you that today's conference is being recorded.

I would now like to turn the conference over to your first speaker today, Qing Liu. Thank you. Please go ahead.

Qing Liu -- Investor Relations Manager

Thank you, [Technical Issues]. Welcome to Phoenix New Media second 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, management will first provide a review of the quarterly results and then conduct a Q&A session. The second quarter 2020 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 statement 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

Thank you, Qing. Good morning, and good evening, everyone. During the second quarter of 2020, the COVID-19 pandemic continued to cause significant macroeconomic uncertainties, as well as substantial headwinds to the entire advertising industry. Undeterred by these challenges, we upheld our commitment to producing premium new contents and focus our resources to create long-term growth and sustainable competitive advantages.

Consequently, we concluded the second quarter of 2020 with encouraging financial results. Our total revenue were within our previous guidance range. In addition, we delivered a positive quarterly operating income of RMB25.6 million. Our solid financial performance demonstrates that our prudent cost control measures have been effectively in combating the widespread market challenges. It also validates our corporate development strategies as we further upgraded our flagship news app, bolstered our brand influence and executed new initiatives with favorable monetization potential in the second quarter.

On our flagship news app front, we continued to improve the platform's capabilities by upgrading its technology, fortifying its content operations and enhancing its content offerings. As a result, we increased the stickiness of our news app. Our platform's user retention rate grew by 39% year-over-year and every time spent by users on the platform increased by 21% year-over-year.

Building up on our experiences in content operations and expertise in AI algorithm, we have constructed a premium content library to cater to the needs of our users. Its growth [Phonetic] competence resides in our seamless integration of content and algorithm by combining our editor's professional judgment with our software's automation capabilities. We have put in place a set of rigorous standard operating procedures to ensure both targeted and efficiency of our content distribution system. Our process starts with our editors, as they leverage their vertical expertise and authorities, recommended hot topics in their respective fields and evaluate the content quality, style and social values. Then our AI algorithm blend editorial recommendations with content categorizations, labels and user characteristics, utilize enhanced content profiling and other demand [Phonetic] techniques and deliver a large content to our users that matched their individual requirements precisely.

Consequently, we are able to satisfy a variety of users' demand switching from the client information to fulfilling personal interests and indulging in entertainment. We have also successfully resolved the Co-star [Phonetic] problem, an information [Indecipherable], but information comes [Phonetic] with technologies but the recommend comes [Phonetic] carefully curated by our editors in an innovative and tinting manner to elevate our premium content exposure, enhance our brand awareness and user revenues [Phonetic] and boost our content distribution capabilities.

In addition to that, to ensure the timely coverage of societal developments and breaking news events, our seasoned editorial team refined our news monitoring process continuously. Moreover, to better satisfy users' entertainment demands and capture their attention, we optimized ifeng's interface, and introduced fresh new format of content, such as portrait mode videos and editor's pick. As a result, our platform is driving stream [Phonetic] of innovative, informative and engaging content further expanded and our value proposition to ifeng users compounded accordingly.

[Technical Issues] value front, we also continued to organize online events during the quarter to enhance our brand image in our advertiser value proposition, and generate traditional stream income. For example, in May, we organized the ifeng finance visual summit, which is the third [Indecipherable] finance event to be held in China since outbreak of COVID-19. Users throughout the country were highly appreciative from the deep financial and economic insights upheld during this event. Related event coverage generated 22.9 million views on our ifeng app, and event trending topics reported around 120 [Phonetic] million views on social media at the same time.

In June, we organized the dialogue with the world online forum in partnership with the national academy of development and strategy of Renmin University of China. This online forum brought together 32 distinguished guests hailing from all corners of the globe -- corners of the globe. In the context of the global pandemic, our ability to host such high-profile online event has proven to be quite effective, enabling us to further augment our brand equity despite our physical constraints and related safety concerns.

In line with these online events, we also continued to expand our library of original IP to ensure that our catalog of content offerings remains highly attractive and of superior quality. During the quarter, for example, we continued to produce Jun Pin Tan, [Indecipherable] show has already delivered outstanding results, a certain episode of Jun Pin Tan recorded over 18.5 million views on our platform. Besides the success of Jun Pin Tan, we also continued to produce Alliance of Heroes. Initially released in September 2019, the show offers in-depth exploration of the Olympics journeys and has captivated audiences across the country. As a result of the show's varying popularity, Alliance of Heroes, was aired by Beijing Satellite TV, one of the most influential satellite TV channels in China.

Furthermore, we have already secured a sponsorship deal for the second season of Alliance of Heroes. We expect to launch in August. The warm reception and commercial success of our high quality original content once again illustrated the premium nature of our brand. Such influence has enabled our brand advertisers, advertising business to achieve sustainable growth despite the challenging market conditions.

We would also like to note that the challenging macro environment significantly impacted our online real estate vertical in the quarter, making especially hard for our real estate vertical to achieve its revenue growth targets for this year. In light of these developments, we will remain focused on streamlining this segment's operations, executing new product innovations and implementing additional cost control measures going forward to safeguard our cash flow and profit growth.

Now, turning to our new business initiatives. In the quarter, we carefully analyzed a number of business opportunities and boldly step up to launch several new promising initiatives in the fields of advertising, media content and e-commerce.

As for our advertising business, we have built several platforms, such as Fengyu and Feng Yi to both fulfill the diverse needs of advertisers, as well as provide customer -- customized advertisement solutions to our clients. Following the success of these two platforms, we decided to develop Feng Fei [Phonetic], a platform capable of bridging the gap between advertising clients and third-party app developers. By interfacing with over 80 apps to access more than 60 million daily active users, Feng Fei is able to help our advertising clients significantly improve their advertising reach.

As for developer side, Feng Fei's ability to help app developers convert and monetize their user traffic has helped to set the platform apart from its competition. Going forward, we plan to produce perform-based advertising solution on Feng Fei, while also enabling platform to interface with other immediate DSP platforms. As we continue to cultivate Feng Fei, we believe that it will also become a new growth driver with the potential to generate a handsome return.

In order to meet the demands of China's rising middle-class for practical and unbiased purchase advice, we also upgraded the Phoenix Lab, [Foreign Speech] video series for product reviews this year. By the end of the quarter, the Phoenix Lab video series has already attracted 1.4 million users and generated a total of 43 million views. As Phoenix Lab currently specialized in consumer electronics reviews, would now mainly focus on establishing brand partnerships in this industry. Nevertheless, as the shows, user recognition and advertisers endorsements continue to grow, we aim to replicate this innovative success formula in other industry verticals going forward.

Recognizing the quality and the size of our user base, we have also ramped up the development of our e-commerce marketplace, ifeng Wutonghui. Since its launch, Wutonghui has been made available to users throughout ifeng.com, as part of our WeChat official accounts and attracted around 90,000 followers in total on WeChat. Additionally, during the 618 Shopping Festival, we developed a membership system to better facilitate user purchase and boost user stickiness. As a result, Wutonghui facilitated a record GMV of RMB33 [Phonetic] million in June. Although, Wutonghui is still at a relatively entire early stage of development, we believe that it has already demonstrated a substantial potential for monetization, and we are optimistic about its future growth prospects.

Now, let me share you an update on the Yidian transaction. As we have announced previously, the current macroeconomic uncertainties have led to some pressure on the buyers' funding resources. However, if the transaction were to be terminated, then we would face a serious immediate challenges, such as financing additional investment in Yidian and managing the platform without distracting us from our long-term strategic focus. As a result, we believe that the current total consideration of Yidian $350 million is we think a reasonable range.

In addition, after careful consideration and analysis, we are certain that the recent valuation adjustments are in the best interest of all parties, one will serve to maximize our shareholder value long-term.

In summary, during the second quarter, we continued to accelerate our growth momentum by upgrading our flagship news app, fortifying our brand equity and executing new business development initiatives on multiple fronts. While the current macroeconomic uncertainty and industry headwinds make forecasting difficult, we believe that our progress to date has helped set the stage for sustainable growth in the future. Moreover, as we continue to advance throughout the rest of the year and beyond, we plan to remain prudent in our investments, and channel our resources only to those initiatives with attractive potential ROI.

Looking ahead, we aim to leverage our competitive advantages in professional journalism, abundant working capital and efficient distribution networks to bolster our new media leadership in China, delivering sustainable growth and generate increasing shareholder value in the long run.

Yeah. With that, I'd like to pass to our CFO. Edward, please.

Edward Lu -- Chief Financial Officer

Thank you, Shuang, and thank you all for joining our conference call today. Before I update you own the financial details, I would like to elaborate on the impact of the disposal of our equity interest in Tadu. On May 18, 2020, ifeng sold all of its investments in Yitian Xindong, which owns and operates the Tadu apps that provide digital reading services. The disposal of Tadu represents our strategic shift in operation of online literature business that had a major effect on our operations and the financial results. Therefore, the disposal of Tadu was qualified for reporting as a discontinued operation in our financial statement. Accordingly, Tadu's results of operations have been excluded from continuing operations in the condensed consolidated statements of comprehensive income/loss and are presented in separate line items as discontinued operations for the second quarter of 2020 and the prior period.

Additionally, the related assets and the liability associated with the discontinued operations in the prior year consolidated balance sheet are classified as asset, liabilities held for sale to provide the comparable financial information. The financial information and the non-GAAP financial information disclosed in this press release is presented on a continuing operations basis unless otherwise specifically stated. For the details, please refer to our earnings release.

Let me take you through our financial highlights for the second quarter of 2020. Our total revenues in the second quarter of 2020 were RMB312.3 million, which were in line with our previously guided range and represented a decrease of 9.7% from RMB345.9 million in the same period of last year. The decrease was primarily due to the negative impact of COVID-19 outbreak and the intensified industry competitions. I will provide some additional color on our revenues in the second quarter of 2020.

Net advertising revenues in the second quarter of 2020 were RMB286.3 million, representing a decrease of 7.5% from RMB309.5 million in the same period of last year. The decrease was primarily attributable to the previously stated reason.

Paid services revenues in the second quarter of 2020 decreased by 28.9% to RMB26 million from RMB36.4 minute in the same period of last year. Revenues from paid content in the second quarter of 2020 decreased by 29% to RMB14.2 million from RMB20 million in the same period of last year, mainly due to the market condition, as well as the tightening of rules and regulations on digital reading.

Income from operations in the second quarter of 2020 was RMB25.6 million, compared to loss from operations of RMB75.5 million in the same period of last year.

Operating margin in the second quarter of 2020 was positive 8.2%, compared to a negative 21.8% in the same period of last year.

Non-GAAP income from operations in the second quarter of 2020 was RMB27.8 million, compared to non-GAAP loss from operations of RMB73.1 million in the same period of last year.

Non-GAAP operating margin in the second quarter of 2020 was positive 8.9%, compared to negative 21.1% in the same period of last year.

Net income from continuing operations attributable to ifeng in the second quarter of 2020 was RMB2.8 million, compared to net loss from continuing operations attributable to ifeng of RMB69.8 million in the same period of last year.

Non-GAAP net income from continuing operations attributable to ifeng in the second quarter of 2020 was RMB23.7 million, compared to a non-GAAP net loss from continuing operations to ifeng of RMB67.9 million in the same period of last year.

Moving on to our balance sheet. As of June 30, 2020, the Company's cash and cash equivalents, term deposits, short-term investments, and restricted cash were RMB1.72 billion or approximately $243.9 million.

Finally, I would like to provide our business outlook for the second quarter of 2020. We are forecasting total revenues to be between RMB295.4 million and RMB315.4 million, representing a decrease of 14.1% to 7.2% year-over-year. For net advertising revenues, we are forecasting between RMB275 million and RMB290 million, representing a decrease of 12.2% to 7.4% year-over-year. For paid service revenues, we are forecasting between RMB20.4 million and RMB25.4 million, representing a decrease of 23.7% to 5% year-over-year.

To conclude, our decision to take the long-term view and prioritize these investments capable of delivering quality ROI started to show positive results in the quarter. Such progress was not only illustrated by our profitability expansion, but more importantly, also by our successful implementation of effective cost control measures, which have helped to make us leaner and place us in a stronger position to achieve our future financial targets.

Going forward, to sustain our growth momentum, we will invest in those areas that will improve our product offerings, accelerate the development of our new business initiatives and refine our operating efficiency, despite the challenges caused by the outbreak of COVID-19 and the resulting macroeconomic uncertainty. We believe that our competitive brand advantages and effective cost control measures will enable us to weather the current environment and emerge from the crisis stronger than ever uphold a foundation built to support our enduring goals.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from Zhibin Zhang [Phonetic] from First Shanghai Securities. Please ask your question.

Zhibin Zhang -- First Shanghai Securities -- Analyst

Hi, management. Thanks for taking my question. Could you share some updates on the advertising business in the second quarter, such as recovery status for the brand and performance-based at the advertiser budget expanding in different verticals? And how do you think about the advertising industry in the second half of this year?

Edward Lu -- Chief Financial Officer

Hey, Zhang [Phonetic]. Thank you for the question. No, although the overall advertising market continued to be affected by the epidemic in the second quarter, we still managed to grow our advertising revenue by 37% on a sequential basis. Apart from seasonality and holiday effects, our sequential growth was driven by our long established brand influence, as well as our ability to quickly adjust our advertising business development strategy to the new environment.

For our brand advertising and performance-based advertising accounted for 79% and 21% of our quarterly advertising revenue, respectively. Our strategy to focus on premium content production and technology advancements enabled our organic brand advertising segment to maintain its upward trajectory despite the impact of the epidemic. Actually during the quarter, for example, we continue to optimize our AI algorithms to meet the diverse needs of our brand advertising clients. We also improved the accuracy of our targeted advertising services and developed new ad products by incorporating new media format, such as live streaming. These efforts enabled us to further enhance the conversion rate for our brand advertising clients.

On the other hand, our performance-based advertising underperformed during the second quarter unfortunately. The decrease was due to, in my opinion, two major factors. First, SMEs reduced their overall advertising budgets as a result of the epidemic. And thus, more likely to focus their limited advertising budgets toward short-form video platforms. Secondly, the popularity of live streaming e-commerce resulted in a decline of pragmatic advertising made by our e-commerce clients, especially those small and medium size platform clients.

By industry, the top five industries of our advertising clients are: auto, e-commerce, financial services, IT and consumer electronics, and FMCG. For us, the fastest-growing industry in terms of advertising in 2020 so far is IT and consumer electronics, followed by FMCG, which is consistent with the overall trend of Internet advertising. And we expect it to continue to grow in the second half of the year. By and large, in the first half of the year our e-commerce advertising, especially performance-based e-commerce advertising has not been performing very well, and we are working hard to try to improve the situation by optimizing our advertising algorithms and recommendation systems.

As for the auto industry, we recorded a decline in advertising revenue for the first half of the year. However, the industry has started to recover during the second quarter and we expect the decline to become more moderate in the second half of the year.

Financial service advertising revenues is expected to be roughly flat year-over-year basis. Actually, the advertising market in China is expected to decline by 2.8% year-over-year in 2020 due to the impact of the COVID-19. In the second half of the year, the advertising market is expected to be affected by the rebound of COVID-19, as well as US-China tensions and other issues. However, we are convinced that we will continue to leverage our core competencies to sustain the expansion of our business in this complex and volatile market.

Thank you, Zhang.

Zhibin Zhang -- First Shanghai Securities -- Analyst

Thanks.

Operator

Thank you. Your next question comes from Binbin Ding from J.P. Morgan. Please ask your question.

Binbin Ding -- J.P. Morgan -- Analyst

Hey, management thanks [Phonetic] as well for taking my question and congrats on a profitable quarter. My question is on progress of the Yidian Zixun transactions. So you announced in -- based on the sale of Yidian last week, afterwards you will be able to get an additional $100 million. So there's no big cash balance to $350 million in total. So can management talk about the details? And then how you're going to use such a big amount physically [Phonetic]? Are there any potential M&A activity we are looking at? And are they going to [Technical Issues]?

Shuang Liu -- Chief Executive Officer

Thank you, Binbin. This is Shuang. As we have announced, we have already entered into a new share purchase agreement with the buyer, would receive a second payment for approximately $100 million. So after two transactions, they have received $350 million in total. As we all know the market environment has experienced dramatic changes over the last couple of months, the outbreak of COVID-19, in particular has disrupted capital markets more severely than many people could have imagined. After evaluating the current operating conditions of Yidian and the conditions of comparable companies in the capital market, as well as the funding challenge of the buyer and many other reasons, we finally have agreed on the adjustment to Yidian's valuation. After the adjustments, the overall valuation for the sale of equity interest in Yidian is still largely in line with current market level. So, after considering our own situation and the overall market environment, we believe this is -- this transaction is in the best interest of the Yidian and all shareholders.

As to the use of proceeds, notably, our net loss in the first half of this year has been significantly reduced compared to the same period last year. In fact, we turned profitable this quarter very challenging -- under the very challenging environment. It is a result of a series of strategic shifts and stringent cost control measures that we have implemented starting in the last year. The completion of Yidian transaction has further strengthened our cash reserves and will definitely put us in a better position to face the challenges ahead despite the volatile market environment. Meanwhile, we will also focus our exploring more opportunities in our online verticals. Our abundant capital reserve will help us to better seize these opportunities and take our business to a new level of growth.

As to potential M&A initiatives, we're going to take a more prudent approach in the light of the current market uncertainties. We're going to focus on core competence. We'll rigorously evaluate the ROI and to think about whether the new target will be supplemental to our existing brand equity and current user base.

I hope this answered your question, Binbin. Thank you.

Binbin Ding -- J.P. Morgan -- Analyst

It does. Thanks very much. Thanks, Shuang.

Operator

Thank you. The next question comes from Guang Zhao Fang [Phonetic] from Taihe Securities [Phonetic]. Please ask your question.

Guang Zhao Fang -- Taihe Securities -- Analyst

Okay. Good morning, management. [Technical Issues] Thank you for taking my questions. So my question is, could you please further elaborate on your new business initiatives such as Feng Fei, and the Phoenix Lab?

Shuang Liu -- Chief Executive Officer

Okay. Thank you. This is Shuang. Feng Fei is an advertising platform that we built based on in-app ad solutions. The platform enables app developers with less traffic to access our commercial resources, advertising data and service capabilities through a set of advertising monetization solutions. Since its launch, Feng Fei has served nearly 100 apps, with a DAU coverage of approximately 60 million, as I mentioned in my opening remarks. In addition to helping app developers monetize their user traffic, Feng Fei also enable our apps to be distributed on more platforms. So, consequently, we expect Feng Fei to bring additional revenue to our advertising business in the future.

As to Phoenix Lab, you mentioned, it is designed to offer review of products and service that are both trustworthy and entertaining in the form of short-form videos, thus providing unbiased purchasing advice to China's rising middle-class. Its Chinese name is [Foreign Speech]. We are currently focusing our reviews on consumer electronics as we distribute our reviews across all major short-form video platforms and social media channels. We have already attracted over 2 million loyal subscribers. In the future, we plan to expand the product categories to include parenting, cosmetics, and lifestyle services. We believe that our product reviews in these area will also strengthen our content coverage in the related verticals.

Leveraging our market strength in advertising space, our ability to provide valuable content to our users will help us further enhance the influence of our brand and gain more recognition from our brand advertising clients. That's how the model works. We hope that in the next few years -- in the next year, Phoenix Lab, [Foreign Speech], will be able to become the go-to destination for product reviews in a several different verticals. In addition, we will also explore the monetization opportunities for Phoenix Labs through live stream e-commerce and offline events in the future.

As always, we will actively explore new business opportunities through continuous innovation. We remain committed to strengthening our brand equity, content production expertise and R&D capabilities. We're confident we also work to expand our user base and diversify our revenue streams through new products and services.

Thank you.

Operator

Thank you so much. [Operator Instructions] There are no further questions at this time. I'd now like to hand the conference back to management. Please continue.

Qing Liu -- Investor Relations Manager

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

Thank you, all.

Operator

[Operator Closing Remarks]

Duration: 38 minutes

Call participants:

Qing Liu -- Investor Relations Manager

Shuang Liu -- Chief Executive Officer

Edward Lu -- Chief Financial Officer

Zhibin Zhang -- First Shanghai Securities -- Analyst

Binbin Ding -- J.P. Morgan -- Analyst

Guang Zhao Fang -- Taihe Securities -- Analyst

More FENG analysis

All earnings call transcripts

AlphaStreet Logo