Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Phoenix New Media Limited (NYSE:FENG)

Q1 2014 Results Earnings Conference Call

May 12, 2014 9:00 p.m. ET

Executives

Matthew Zhao – Manager-Investor Relations

Shuang Liu – Chief Executive Officer

Betty Yip Ho – Chief Financial Officer

Ya Li – Chief Operating Officer

Analysts

Alan Hellawell - Deutsche Bank

Philip Wan - Morgan Stanley

George Meng - Macquarie

Natalie Wu - CICC

Alicia Yap - Barclays

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Phoenix New Media first quarter 2014 earnings call. At this time, all participants are in a listen-only mode. (Operator Instructions) I must advise you that this conference is being recorded today, Tuesday the 13th of May, 2014.

I would now like to hand the conference over to Mr. Matthew Zhao. Thank you. Please go ahead.

Matthew Zhao

Thank you, operator, and thank you and welcome to Phoenix New Media first quarter 2014 earnings conference call. I’m joined here by our Chief Executive Officer, Mr. Shuang Liu; our Chief Operating Officer, Mr. Ya Li; and Chief Financial Officer, Ms. Betty Ho.

For today’s agenda, management will provide us with a review on the quarter and also include a Q&A session after the management’s prepared remarks. The first quarter 2014 financial results and the webcast of this conference call are available at the Investor Relations sections 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 statements 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. Liu Shuang, our CEO.

Shuang Liu

Thank you, Matthew. Good morning and good evening everyone. We are very pleased to be in 2014 with a robust characterized by strong financial and operational performance. 2014 also marked the expansion of the online verticals, mobile platform and the media offering. On the topline, we comfortably beat consensus and prior guidance propelled by the promising 41% growth in net add revenues. This strong advertising growth reflects the success we have had with building our brand and expanding our user base.

Operationally, we were able to increase online daily unique visitors by 33% year-over-year to 42.8 million. Our operational growth was fueled by the strong performance of several of our verticals including fashion, which is now ranked number one in terms of daily unique visitors. The first quarter was a very eventful period in China from a media perspective. We experienced the Malaysia airplane mystery, terrorist attack in the Kunming train station, Michelle Obama's China visit and the several other impactful news stories.

It is during these eventful and transformative times in China that ifeng's products in this tightly regulated media market, breaking the daily news, the public encounters in the third world, we believe that we surely stand apart from peers due to our serious journalism and media brand influence. We have become China's indispensible multi-screen media platform to a high quality media company enabling us to continue to grow our audience on both the PC and mobile platforms. As an example our distinguished news reporting around these peak news events help us attract many first time users to our mobile platform.

In the first quarter, we began to use China Mobile's 4G technology to bring our users live forecasting of these large media events. During this time we also released a 4G ifeng news app, a new version of our ifeng app. We see positive long-term benefits from the influence of mobile traffic as these new users enjoy the fast speed of 4G and further explore our differentiated and broad content.

By both attracting new users to our media platform and mobile platform and providing existing users improved viewing options, we are able to further accelerate the growth and monetization of our mobile audience, which now reaches over 26 million on a daily basis. With China's on the go culture becoming even so pervasive, the mobile strategy will remain on center-stage with users and Internet companies alike. For ifeng, we continue to focus and grow our mobile platform as recently demonstrated through our agreements with Samsung to preinstall ifeng news on their top selling Galaxy S5 smartphones throughout China.

This cooperation will further help us vie to become the go to source from differentiated news offerings on mobile devices in China. This continued focus on mobile should not be taken to mean we will deemphasize our PC platform. In fact, our goal is to leverage our media platform in this multi-screen world. In doing so, we continue to work to attract additional users on the PC front and more importantly, while working to enter our audience's living rooms through Internet TV. In an effort to broaden the viewership possibilities of our media content, we have struck unique partnership with Internet TV manufacturers in China, such as Xiaomi, Hisense and Konka.

Similar to our partnerships with China's mobile carriers, this expansion provides us new collaboration and advertising opportunities. Within the focus to our content strategy, we believe that our deepening engagement with user across all verticals necessitates a great focus on original content generation. On the video production side, Super Mummy, which is now in its third season, continues to be a hit and has attracted a significant number of sponsors. Our effort with in-house original programming as well as professionally produced short-form news reviews, continue to contribute heavily to the expansion of our ifeng video offering. The ifeng video offering now ranks number four among integrated portals and number seven among all video-focused websites.

In addition, to maintain our leading position in the news and current affair coverage, we are focusing more on strengthening our urban lifestyle related information on online services for our audience. Facing the growth in urbanization and emerging trends associated with Chinese middle class, we can witness the demand related to their new metropolitan lifestyle. This provides us insight into the related content and services associated with that class, which are massive and possess huge market potential. These trends have helped propel fashion and entertainment verticals to new event number one and number two in China, respectively, in terms of daily unique visitors according to iResearch.

For our fashion vertical, our featured reports of all the four major fashion weeks attracted over 20 million visitors with over 116 million page views this past quarter. Meanwhile, our growing cosmetics section attracts a large number of high-end female consumers who are searching for the most updated and cutting-edge cosmetic information available. Such as news releases, major functions and a comparable product. In addition, our other verticals have demonstrated similar growth patterns. Our other vertical is now ranked number four in China with over 3 million daily unique visitors. And our real estate vertical is now ranked number three with 2.5 million daily users in China.

We aim to be more aggressive and focused on tapping into this market dynamic by expanding either by partnerships and acquisitions or through organic growth by better leveraging existing resources by quickly adapting to market changes, enabling us to more quickly capture market opportunities. Meanwhile, by leveraging our proprietary new content and focusing on providing unbiased and comprehensive reporting, our unique model continues to support our evolution into a truly diversified new media company.

As an example, in the aftermath of Flight 370's disappearance, we have provided exclusive live coverage across our platforms and published a series of feature reports. In addition, we complemented this content with in-depth analysis, thought-provoking commentary, live video coverage, and a mechanism for users to contribute and discuss during this time of mourning. We believe that such powerful contributions to Chinese society during these times help to significantly differentiate ifeng from traditional new aggregating portals.

Going forward an important contributor of content and provider of course, will come from convergence with our parent, Phoenix TV. As the CEO of Phoenix New Media and the COO of Phoenix TV, implementing the conversions of the Phoenix Group's TV and Internet properties with an ongoing core focus online. We have already achieved modest results in terms of initial restructuring and in the first quarter we even began to co-produce other shows. We are happy with the progress we have made with these early stages. And the fact that tangible results in terms of content, [average] (ph) pricing and user growth synergies will be realized going forward.

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

Betty Yip Ho

Thank you, Shuang, and thank you all for joining our conference call today. Let me take you through our financial highlights from the first quarter 2014 results. The amount mentioned here are all in RMB unless otherwise noted and all numbers are mentioned here are in non-GAAP adjusted numbers. The difference between GAAP and non-GAAP is the adjustment of the shared-based compensation expense, gain on disposition of a subsidiary and acquisition of equity investment and loss from equity investment.

Ifeng total revenue for the first quarter came in at RMB357.1 million, which exceeded the high end of our guidance. Adjusted income attributable to Phoenix New Media for the first quarter was RMB56.9 million or RMB0.73 non-GAAP net income per diluted ADS.

Let me now run through the other key financial highlights starting with revenue. Net advertising revenues for the first quarter came in at RMB234.9 million, which represents a solid year-over-year growth of 41.1%. Average revenue per advertiser or ARPA increased by 34.4% to RMB900,000 and advertisers number increased by 5% to 253. Paid service revenues for the first quarter was RMB122.2 million, which represents a year-over-year growth of 6.3%. Mobile value-added services revenue increased by 2.4% to RMB98.2 million. Games and other revenues increased by 26.4% to RMB24 million.

Secondly, gross profit and margin. Adjusted gross profit for the first quarter of 2014 increased by 34.8% to RMB186.2 million. Our adjusted gross margin for the first quarter was 52.1%, up from 49.1% for the same period last year. In terms of cost of revenues, there are four components. Revenue sharing fees relating to paid services, content and operational costs, bandwidth cost, and sales tax and charges.

Revenue sharing fees as a percentage of total revenues decreased to 15% from 17.6% due to the increase of net advertising revenues. Content related costs and operational costs as a percentage of total revenue decreased to 19.9% from 20.1%. Bandwidth costs as a percentage of revenues decreased to 5.8% from 6.6%. And lastly, sales taxes and surcharges as a percentage of total revenue increased to 7.1% from 6.7% due to the increase of net advertising revenues.

Thirdly, adjusted operating expenses for the first quarter increased by 24% to RMB132.3 million. The increase in operating expenses was primarily attributable to the increase in staff related costs and expenses associated with the company’s marketing and promotional initiatives. Adjusted operating income for the first quarter increased by 71.7% to RMB54 million. Adjusted operating margin for the first quarter improved to 51% from 11.2% for the same period last year.

Fourthly, adjusted net income attributable to ifeng for the first quarter increased by 47.2% to RMB56.9 million. Adjusted net income per diluted ADS for the first quarter increased by 49.1% to RMB0.73. In terms of balance sheet items, as of March 31, 2014 ifeng's cash and cash equivalents and bank term deposits totaled RMB1.4 billion or approximately U.S. $224 million.

Lastly, I would like to provide our business outlook for the second quarter 2014. We are forecasting total revenues to be between RMB405 million to RMB418 million, representing an increase of 11% to 15% year-over-year. For net advertising revenues, we are forecasting between RMB290 million and RMB298 million, representing a growth of 38% to 42% year-over-year. For paid services, we are forecasting between RMB115 million and RMB120 million.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Alan Hellawell from Deutsche Bank. Please ask your question.

Alan Hellawell - Deutsche Bank

Congratulations on a very strong bottom line. If you don’t mind, I have three questions. Firstly, just looking at our assumption, it looks though you came in comfortably below our assumptions on the sales and marketing R&D front, can you explain what made it happen here and should expect more of the same for the rest of the year. Secondly, what percent of revenues have come from mobile and what are the challenges and opportunities you see as you cross kind of the chasm in the mobile world. And then finally, Shuang mentioned that we succeeded in harmonizing our business gradually with Phoenix Satellite TV. How will this process impact margins and other parts of P&L as we think about additional costs on one side and synergies on the other. Thank you.

Betty Yip Ho

Hi, Alan. Good morning. Let me answer your first question about sales and marketing expenses. For sales and marketing expenses our first quarter (indiscernible) was about RMB74 million. As compared to first quarter last year we have increased about RMB20 million. And, however, in terms of percentage as of total revenue, our sales and marketing margin was up about 20.9% which is similar to last quarter which was at 19.5%. So we remain at about 20% moving forward and in terms of absolute number, the increase was mainly due to the increase of the promotion cost for our news ads, for our video ads and our games. They totaled about RMB10 million. So moving forward, as I said, we expect to be around 20% to the total revenue.

Ya Li

Hi, Alan, this is Ya. Thanks for the question. Yes, about the mobile. First the mobile advertising revenue contributed 10% to our overall advertising revenue as we continuously increased our advertising revenue and the overall mobile advertising contribution will help a lot on the mobile monetization as well as the margin. As for the mobile strategy, overall we focused on both content and the channel as well as strategic partnership. I think these three vehicles, three basically wheels, help us to move forward.

First on the content. We emphasized that we provide original content and we have a strong media influence. That’s the base for our second and third legs. The channel cooperation is very important, especially in the area of 4G. As our exclusive content is very sought after by both the handset manufacturers as well as the operators. And also especially in the mobile video front, since our short-form news video fits very well with the 4G operators as well as the handset manufacturers. We are forming a lot of strategic partnerships. As Shuang mentioned in his prepared speech that not only with Samsung, we are also negotiating and also signing and implementing a lot of pre-installment agreement with the handset manufacturers. And also this 4G opportunity brings to us these data traffic centered strategy to focus for the operators.

And also then on the strategic partnership side. We have been also discussing with a lot of product and technology driven mobile startups. Trying to leverage these startups technology competence to improve our product offering on the top of our (indiscernible) oriented approach towards content. So the content and brand plus the channel cooperation, plus the strategic partnership is helping us to develop and grow our mobile traffic. We have experienced a 10% quarter-over-quarter overall daily active user growth. We are focusing both on the mobile apps as well as the mobile Web site. They would (indiscernible) browser-based traffic. The overall mobile traffic now represents slightly below 40% of our overall daily active user and for future monetization in addition to the current mobile advertising. We are also exploring native advertising driven or content stream-based advertising format to help increase -- improve our mobile ad monetization.

We are also looking at the great opportunity of mobile gaming and other paid mobile services in the 4G area. And in fact these paid service revenue will grow in the second half of this year and also partly offset our proactive retreat from the traditional value-added service from the 2G feature phones. I think that's -- I don’t know if Shuang has something to add.

Shuang Liu

Alan, this is Shuang. I would like to get back to your question three. Actually, if you like, my mandate as COO of the Phoenix TV is to further implement the conversions into these groups, TV and Internet, properly. That’s my main focus. I have been on the position for two months. So it's still at a very early stage. At this stage, it is hard to quantify the concrete impact of the (indiscernible) things. But I think the conversions would definitely make contribution to our margin improvement. Because the benefit is very obvious there. We can co-produce and we can co-host, marketing driven campaign like an industry summit and political forums and even can even co-purchase some programming. So that will enable us to spend less to achieve greater influence, achieve greater audience impact. But it's still at a very early stage so we are still at the stage of doing internal restructuring and brainstorming. But we will keep you updated about the new developments on the convergence on both sides.

Operator

Our next question comes from the line of Philip Wan from Morgan Stanley. Please ask your question.

Philip Wan - Morgan Stanley

Congrats on a good quarter and thanks for taking my question. My question is about your advertising initiatives. This quarter we saw a jump in spending for advertisement. Could you give us more color on just how much was driven by your organic price increase? And then the second is, going forward how should we look at your customer acquisition for your advertising initiatives. Thank you.

Ya Li

Okay. Thanks. Philip. This is Ya. Thanks for the question. First in the beginning of this year we did increase our advertising price for the premium A plus category by 20%. Also for the video ad, the rate increase was 30%. And we plan to continue to have slight rate increase for our PC advertisement. We will have low double-digit rate hike for our mobile advertising price in the second half of this year. So going forward, I think the rate hike will continue to be a factor as well as the number of advertisers to our overall advertising revenue growth.

And as for the customer acquisition, I think our approach right now is what we call it, native marketing plus native advertising. Native marketing refers to evolution of brand advertising. It's a upgrade from the old banner display ad. It leverages our special capacity of content marketing and we have integrated brand message within the content we deliver. And that’s something overall global movement in the past two years starting from United States. Actually all the media companies as well as the new -- even social media companies are embracing this idea of native advertising and native marketing.

So that kind of approach will not directly reflect in the banner rate card increase but rather in the new approach for us to take a bigger market share of clients, because we can deliver real value, real influence to the clients. Especially in this age, when the audience becomes ever increasingly blind to a hardcore advertisement be it a preview before online a video or a pure banner, a traditional banner on the portal. And I also mentioned the term native advertising in which we refer to our innovation of the advertising format or advertising product. Especially on the mobile Internet side. Currently, including us, we are very good at monetizing the front page or the starting page of mobile apps. However, we believe there are great potential in native advertising format and we are studying international progress on the native advertising movement. And we do believe that this native advertising format (indiscernible) both on PC and mobile will help us to better monetize our existing large traffic and high quality user base.

Philip Wan - Morgan Stanley

Thank you. That’s very helpful. May I have a follow-up question? So this quarter, how much of your revenue is coming from video? And also as we compare PC versus mobile, what is the actual spending on mobile as compared to the gap between advertising spending on PC and mobile. Thank you.

Ya Li

Okay. Thanks for the quarter. Yes, this year the video advertising for the first quarter contributed 18% of overall ad revenue. Mobile comes at 10% compared to 16% and 8% respectively a year ago. So each of the -- the mobile and video each have a 2% increase in their contribution to overall ad revenue. And if we look at the gross rate, the video advertising grew by 53% in the first quarter over a year ago compared to the industry average of 41% based on iResearch study. Also our mobile grew by 84% compared to the industry average of 76%. And also our second quarter guidance was also -- the midpoint is also 40%. The first quarter was 41%. I think this is well above the industry average for portals or even the industry average for the overall online revenue growth of 35% based on iResearch study. And this is gross rate. And the other question was...?

Philip Wan - Morgan Stanley

Yes, I just wondered--

Ya Li

You did have another question?

Philip Wan - Morgan Stanley

Yes. I just wondered if you can add some color in terms of advertising spending behavior between PC and mobile. For example, average spending on mobile versus PC.

Ya Li

Yes. We definitely see a stronger demand for mobile advertising from our clients and we do see similar sector distribution for our top contributors for PC and mobile advertising. And in terms of pricing model, right now it's still, as I mentioned most of the CPT based. For example, for the mobile apps advertising is also the starting page, a certain price per day and as a (indiscernible) of CPM, I think the PC front page still enjoys a greater CPM compared to the mobile CMP. And as I mentioned already, we are focusing innovative approach to new advertising formats and we do expect that to help us in the next 18 months. Yes, that’s the pricing comparison between PC and mobile. Thanks.

Shuang Liu

I want to add a few more words about our business. Actually, as I emphasized in my opening remarks, we are living in advertisement world. If you look at the performance of our quarter, I think it's performing still very robust, very strong. That actually sets us aside from other portals in China. In the last quarter, we experienced a series of major events. That contributes a lot to our traffic growth. So where the portals had traffic still growing, so we had kind of sweep rate internally between marketable platforms, between PC, tabs and smartphones. And PCs category is not losing steam, it's still growing. So that provides a solid foundation for our fundamental business growth which is good to see. Of course, the wireless platform and wireless advertising will be our new driver. That’s going to be our main focus going forward.

Operator

Our next question comes from the line of Alex Yao from J.P. Morgan. Please ask your question.

Unidentified Analyst

Congratulations on a very strong quarter. This is [Ben Mclain] (ph) on behalf of Alex. Thank you for taking my question. My question is actually on the advertising. I am just wondering, can management share the key verticals or the vertical mix on advertising revenue. Is there any verticals which performed extremely strong due to the weakness of some underlying industries such as real estate. And what is your general outlook on the advertising revenue for 2014. I think you mentioned the overall growth should be in 30s. So given the first quarter performance, is there any potential to deliver a stronger performance than our previous outlook. Thanks.

Ya Li

Hi, Alex. Thanks for the question. This is Ya. First of all, the top contributors, the sectors. We have the top five sectors remain almost the same as a year ago, with auto contributing the most with 27%, and beverage and food, wind contributing 17% to a 1% drop from a year ago. And also the ecommerce 12% with 3% increase from a year ago. And then it's health and medical service, 9%, remain the same as the year ago, and also the financial service, 5%, so 1% increase from a year ago. That’s the top five sectors. For the top ten sectors, it's total adds of 83% of our overall contribution. Among these sectors, we see auto remain the same as previous quarters. The beverage, especially the Chinese wine sector, is relatively weak because of the policy, I think, of the government.

However, we were able to keep the Chinese wine contribution about the same with our dedicated news video fit very well with this sector. And also we did hold a Chinese wine industry summit in the first quarter which also helped us to grow our market share in this sector. The other sector we see weak demand is luxury brands and also certain IT services. And then when we look at the overall year outlook, currently we do see lower visibility actually compared to a couple of quarters ago. We keep a close eye on the macro economy as well as the government's (indiscernible) policy. And right now we are still focusing a mid-30 growth rate for our advertising revenue despite the fact that the first quarter and second quarter guidance is about 40% due to this lower visibility I mentioned. We want to be, I think, cautious going forward.

Unidentified Analyst

Thank you. And my second question is on your general video content strategy for 2014. So there's actually some government censorship over the video content in first quarter. So just wondering, does this have any impact on your overall video content strategy? So are you continuing to focus on your video UGC or are you actually trying to offset or shift some focus to some other content? Thanks.

Ya Li

Yes. I think actually the recent changes actually helped us reaffirm our content strategy and the direction. And when we look at it there are two structural changes, if I can quote structure. One is, of course, I think the cleaner content environment will have our content to compete for bigger share of audience time and eyeballs. And I think that’s just -- I think as we did not have, especially user-generated or the software generated or the professionally made but I would say very doubtful content from certain video platforms. And so the first change about the government's the policy to clean the video content will certainly help us to compete for bigger time-share from the same audience.

And secondly, we notice that Hunan TV and CCTV did allow some new policy regarding not licensing, withholding the content from licensing to the online platforms. Basically I think we will -- basically this tells that the value of content is very important in the video platform contribution. Again, we see the user-loyalty actually follows top content. That’s why if we look at our own content mix, we have 40% of our content from Phoenix TV. This very exclusive, high value, high quality news driven and some documentaries. And also we have a single-digit contribution from in-house made -- or actually about 10%, our in-house made video content. And thirdly, it's from the aggregations of other professional made content.

But overall, we focus on the news and documentary and other talk shows, debate shows or interviews. This content is very different from the entertainment-focused content. Our user-demand may not be as big overall as entertainment video category. However, we are the only differentiated and also undisputed leader in this vertical. It helps us to gain -- to develop partnerships with the handset manufacturers as well as the telecom operators based on these kind of content. Another thing I want to emphasize on our content strategy is, in the first quarter we increased our original content production. For example, we did produce three seasons of a parenting program, video program called Super Mommy, which has clear vertical interest towards young parents and also a strong advertising demand with certain factors.

Second, we also produced cooking competition reality show called Match of the Taste (indiscernible). Which just started to be available online and this will also be available on Phoenix TV as part of our convergence strategy. So the food sector, the parenting sector, these are clear sectors, will help us with our vertical strategy. We are also planning to produce video shows within, for example fashion and entertainment sector. And it's a part of our advertising strategy also part of our video content strategy. And so I think that’s our take on the overall -- the industry change and also our determination to continue our strategy.

Operator

Our next question comes from the line of George Meng from Macquarie. Please ask your question.

George Meng - Macquarie

Congratulations on a solid quarter. I actually have three questions, if I may. The first question is related to your second quarter guidance, especially the paid service revenue guidance. I wonder if you can give us a little more granularity in terms of the breakdown of the paid services. Probably you cannot give like exact numbers but I just wonder -- because I think this guidance is a little bit lower. And I understand there is some impact from the transition from business tax to a value-added tax but just wonder, for example, which part of the paid service is actually weaker than your expectation, i.e. is it like the traditional 2G, ringtone, SMS, or it's the digital reading or the video, or basically it's the game and others revenues? That's my first question. Thanks.

Betty Yip Ho

Hi, George. This is Betty. Let me answer your first question. With respect to the paid services, we have guided about 24% decrease. It was due to two reasons. First reason was mainly due to the change of the revenue sharing ratio between telcos and our channel partners. It has been increased by 12%. So as a result it will impact our gross margin. And the second reason is being the recent change/introduction of the VAT to replace the sales tax of the telecom industry. It will be effective from 1st of June this year. So these two areas will affect mostly our mobile video and the wireless value added services. As a result we decided to trim down the revenue contribution for the second quarter. However, for the full year we are still formulating a long-term strategy to update you and share with you in time.

George Meng - Macquarie

Okay. Cool. But just to follow up on that, so you are not really seeing any accelerated, I would say decline in the paid service, especially the traditional legacy 2G kind of service? Because we know that eventually this part of the revenue will probably slow down, actually decrease, but you are not really seeing an acceleration and decrease in the near term, right?

Betty Yip Ho

Well, for the paid services, especially for 2G related services. We are actually always forecasting a decreasing at about 10% to 15%. So actually it's in line with our expectation.

George Meng - Macquarie

Okay. Cool. That's very helpful. My second question is related to your real estate channel because you mentioned that it's already the number three real estate portal or channel in China but I believe it's not really generating a lot of revenue for you guys. And you mentioned the JV last time, I just wonder if you can give us any update in terms of the JV and also your plan in terms of monetization for the real estate channel. Thanks.

Shuang Liu

Yes. Hi. This is Shuang. Actually, as I mentioned in my opening remarks, in addition to maintaining lead in covering news and current affairs, we are focusing more improving life, metropolitan life, style related information and allied services. This includes real estate, art, fashion and entertainment. Real estate of course is a major, major focus. As we mentioned, we have a relatively high ranking in terms of traffic but the monetization is still at its early stage. We have to bear in mind that this joint venture is just being set up, like three quarters. Yes, just three quarters. So it's still at its early stage. But we definitely realize that the potential for quality of real estate related on line services is huge. But the market supply has not been satisfied. So the market is picking up through accommodate lots of players.

Given our strong brand and relatively a high traffic and a strong partner, I think we will have a chance. Right now we are focusing on more aggressively recruiting top talent in this area and to come out with better innovative products to attract the specific needs of the real estate related users and to improve our infrastructure. We also have a specific focus on senior citizens related pension property and overseas property. Yes, that’s going to be our main focus. But it takes time. We are patient. I think going forward, once with further advancement of our product and infrastructure, the monetization pace will be accelerated.

George Meng - Macquarie

Okay. Cool. And my third and also last question is probably for you, Ya. So it's about native advertising because I think you've talked about native advertising for quite a while now, like you started talking about it a year ago. And I just wonder to what extent has the benefit of native advertising has already been factored in and also what are the upside going forward from here. Especially, again, can you talk separately on PC and also on mobile? Like is there any kind of quantitative benefit that you can actually think of? Thanks.

Ya Li

Okay. First thanks for paying attention, noticing our adaption for the native advertising. Currently we have not factored in quantitatively the increased contribution from native advertising. And actually I want to share more -- just a week ago, we ifeng, Phoenix New Media, launched the first native marketing institute in China. We have 50 industry experts from the major clients. Like certain CMOs of major international and domestic clients and also the executives of advertising agencies, as well as researchers from academics and third party measurement companies. All joining us launching this institute of native marketing (indiscernible) and it received a broad industry attention. And our advertising executives, both Ling and Andy, who are VPs of advertising, have received strong demand from many clients including some of the top telecom operators to talk about the concept and the practice of native marketing within the organization.

And as I have mentioned already, the native advertising will help us first to innovate the advertising format and product beyond the old way of banner display ads which are often ignored by others. And also can help us with monetization on the small screen or mobile Internet. And in addition, the idea of native marketing can also help us to leverage our content capacity to provide sponsor stories, for example, for certain major clients to help their brand message and product message better received by audience. So it's not quantitatively factored in yet but we do see great potential and it has received warm receptions from the industry.

Operator

Our next question comes from the line of Natalie Wu from CICC. Please ask your question.

Natalie Wu - CICC

Congratulations on a solid quarter. Thank you for taking my question. I have three questions. Firstly, I noticed that there had been some change in Phoenix FM and you started to record this business as equity investment since last quarter. I'm wondering how was the revenue used to be recorded, I mean in advertising or in paid service. And can you give us some colors on the rough revenue scale of Phoenix FM? Thanks. The second question is, given that many internet companies are spending a lot of money to promote their mobile apps in 2014 as well as making aggressive investment, I'm wondering what is your investment and spending plan this year. Can you give us some color on the margin trend this year and next year? And lastly, what is the percentage of the organic traffic of your mobile apps? What are the major promotion methods of your mobile apps and can you share with us the monetization outlook? I mean when will your mobile apps reach the breakeven point in the future? Thanks.

Betty Yip Ho

Hi, Natalie, this is Betty. With respect to the FM transaction, actually FM is not consolidated to our balance sheet or to our P&L because we have given substantive participation rights to the investor which was IDG. For this particular transaction, we have one off gain on disposition of a subsidiary on our P&L and it will not happen for the following quarter. It's a one-off item and it's an unrealized gain. For this transaction we also will book the gain and loss as investment gain and loss. So it will not be consolidated to our financial statement. And as for the FM project, now we have just completed the whole transaction about two months ago. So they are still actually structuring the whole team and as for now we are still actually, as I said, upstage. So as of today there is no revenue.

And for your second question, regarding the margin trends. As for the operating margin, this quarter we have recorded about 15.1%, which is an increase from 11.2%. Despite the fact that we have trimmed down the paid services revenue, we are still trying very hard to keep and maintain our operating margin at about same level at 15%.

Shuang Liu

Yes, hi, this is Shuang. I would try to answer your question about mobile. I think your question covers many key words, like breaking-in point, like marketing, traffic, acquisition and all these things. I would try to answer in short form. I think mobile has been our key strategy and we are pretty comfortable with our mobile assets ranking. It's basically inline with our portals ranking. And our advertising growth rate is highly above the -- is above the industry average. So that demonstrates the power and warm reception of the market. Right now we feel reluctant to spend too much money on pre-endorsement, those kinds of marketing tricks. We do strongly believe word of mouth. I think the final fate of the portal will be dictated by the brand, by the user experience, by the proprietary content you provide. That will aside from other players. So we will rather spend more expense on recruiting talents and product innovation.

So we are actually actively seeking opportunities in the market which can improve our product, expand our channel and our bring our technology infrastructure to the next level. So we wouldn’t rule out the possibility of either joint venture or acquisition, or investment into other market players which can complement our existing business, expand our user reach or bring our technology infrastructure to the next level. Yes, did I answer your questions?

Ya Li

Can I clarify one thing -- I want to add one thing that the pre-installment partnerships we mentioned earlier, I think, for us we do not spend. It's not paid. It's all based on the merits and the value of our content and brand. That’s why we rarely compete on the base of our content.

Shuang Liu

All right. I forgot one word, breakeven point. I think we are still at the early stage. Yes. Our main focus will be on expanding or user reach to improve our user experience. I think it's still too early to have that as a big -- to try to emphasize on breaking even.

Operator

Our next question comes from the line of Alicia Yap from Barclays. Please ask your question.

Alicia Yap - Barclays

Thanks for taking my questions. My first question is regarding your achievement on the fashion and cosmetic channels. So can you elaborate a little bit with that achievement and success on that, does that lead you to any change of the mix of your advertising consumer base and how are the tractions in the eyeballs on these fast growing channels compare on the PC versus the mobile? And I have another question. Thanks.

Ya Li

Hi, Alicia, thanks for the question. Indeed fashion is an area we see great potential, not only because of the mostly female audience and also because of the rather great advertising but also ecommerce potential. All of it. Shuang, I think did mention in his prepared script about the fashion weeks, our coverage and influence nationwide. In addition, we have also developed certain products, for example our cosmetic database and it's trial center actually ranks, based on our own knowledge, according to our own base, ranks number one. And that paves the way for us to evolve from this information provider to a service provider and also helps us to integrate ecommerce strategy with this cosmetics and clothing and luxury brands and these very strong demand sectors.

So that’s the answer for the fashion and the female channel. In terms of actual sector contribution, we do expect, like for example the general FMCG contribution and also home appliance as well as ecommerce. Lot of ecommerce contribution who represent the contribution from the traffic and the rankings of our fashion and female channel.

Alicia Yap - Barclays

I see. Can I have a follow-up on that? So I understand a lot of our advertising customers are still on the timed based model but then with these, tractions from these cosmetic and even profession channels and I think with the ecommerce, like you were saying, you're transferring from information to the service provider. Will we eventually maybe testing or introducing on the cost-per-click basis of the advertising model?

Ya Li

Yes, we do not rule out any possibility in terms of, as I mentioned, evolving from an information provider to a service provider and also to have very tight strategy, very tight integration with ecommerce for us through partnerships or investments. Especially on the mobile front, certain cosmetics, we are planning for some fashion mobile apps which have great ecommerce potential. It may not have the same great DAUs as the information service but the direct sales promotion, the sales advertising revenue actually can help us in addition to the brand advertising revenue we already grab from our existing information service.

Alicia Yap - Barclays

That's right. And then my second question is that if we have any more colors or details, given some of the recent crackdowns by the government on the video side. Are we seeing more benefit from there, especially on the traffic side and also from the advertiser? And then related to that is, I think you guys mentioned in terms of the top line growth rate for this year and a little bit lower visibility into the next couple of quarters. So just wanted to get more color. Is that related to a weaker economic outlook or is it more on the sentiment impact from the recent regulatory effect? Thank you.

Ya Li

Yes, definitely, I think we are benefiting from this still ongoing change. I think it's only starting, especially the content owners such as Hunan and CCTV taking new stance and licensing their content. We are definitely going to benefit from it. Secondly, our capacity of producing in-house video content will help us to gain audience to take time share from the competitors. And also I see this, our short form news video strategy also very welcome by the 4G industry sectors. From the operators to the handset manufacturers. So overall, our video business is benefitting from the content change and also the 4G opportunity. And we are leveraging our content capacity to grow our audience. For example, our PC platform, we now have daily active users of 15 million on our PC for our video service, which ranks number four and seven within the video categories as mentioned by Shuang earlier.

The second question is about the overall economic impact outlook on the overall advertising market. Is that the question?

Alicia Yap - Barclays

Yes, that's right. I think you mentioned you have lower visibility versus a few quarters ago, so I just wanted to get some color. Is that more as Chinese economy weakening or is it more the sentiment impact from the advertiser due to the recent regulatory impact?

Ya Li

Yes. I have to say that overall, we do not see a clear change from our advertising client in terms of pushing back or cutting their new budget. We do see certain particular sectors affected by some particular policies. As I mentioned, the luxury brand sector, the Chinese wine sector rare relatively weak. But for some of other top sectors, the auto sector and ecommerce sector, they remain very strong for us. But overall the economic environment do make us feel that there is increased uncertainty in certain areas and that’s why we are taking a more careful approach in terms of giving the outlook.

Operator

As there are no further questions in queue, I will now hand the call back to your speaker, Mr. Matthew Zhao for any closing remarks.

Matthew Zhao

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 nice day.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Phoenix New Media's (FENG) CEO on Q1 2014 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts