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Phoenix New Media Limited (NYSE:FENG)

Q2 2014 Earnings Conference Call

August 11, 2014 9:00 p.m. ET

Executives

Matthew Zhao – IR Director

Shuang Liu – CEO

Betty Ho – CFO

Ya Li – President

Analysts

Alan Hellawell – Deutsche Bank

Alex Yao – JPMorgan

Jiong Shao – Macquarie

Natalie Wu – CICC

Joyce Zhou – Analyst

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Phoenix New Media Second Quarter 2014 Earnings Call.

[Operator Instructions] I must advise you that this conference is being recorded today, Tuesday, August 12.

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

Matthew Zhao

Thank you operator and thank you and welcome to the Phoenix New Media second quarter 2014 earnings conference call. I'm joined here by our Chief Executive Officer, Mr. Shuang Liu, our President, Mr. Ya Li, and Chief Financial Officer, Ms. Betty Ho. For today's agenda management will provide us with the review on the quarter and also include a Q&A session after the management's prepared remarks.

The second quarter 2014 financial results and webcast of this conference call are available at the Investor Relations sections of www.ir.feng.com. A replay of the call will be available on the website in a few hours.

Before we continue, I refer you to our Safe Harbor statement in our earnings press release which applies to this call as we will make forward-looking statements. Finally, please note that unless otherwise stated all figures mentioned during this conference call are in renminbi. With that I would like to turn the call over to Mr. Liu Shuang, our CEO.

Shuang Liu

Thank you, Matthew. Good morning and good evening everyone.

We are very pleased to exit the first half of 2014 with strong momentum propelled by robust growth in both total revenues and net income, which exceeded Bloomberg's consensus estimates. Before I get into the second quarter results, I'd like to first reflect on Ifeng's involving company offerings for Chinese internet users in recent months.

In the last call, we highlighted Ifeng's role in helping our Chinese audience related to the turbulent and dynamic world around them, especially having major events occur like the Malaysian flight disappearance and terrorist attack in the Kunming train station. Now it seems that these global affairs have intensified and have become even more event driven as we have recently witnessed the escalating Israel-Gaza's crisis, the second Malaysian airline incident, and on a light note, the 2014 FIFA World Cup. As world events continue to drive ordinary citizens' demand for real-time comprehensive news coverage, Ifeng remains on top of this chain, by providing in-depth analysis, thought provoking commentary, live video coverage and a mechanism for users to contribute and discuss.

In particular, the 2014 World Cup afforded us the opportunity to attract even more first time users by providing comprehensive and in-depth coverage across our multiple platforms. At the end of June, when the World Cup was in full swing, our PC platform's daily unique visitors reached 45 million, representing a year-over-year increase of 22.5%. This event has also helped us to improve traffic of or sports vertical due to which the World Cup ranked number four amongst our peers, according to a report by Tsinghua University.

The same report founded that 44.3% of the internet users in China follow the World Cup news via Ifeng Sports. We are proud to leverage our media DNA to attract sports fans to our platform to read sports related news articles, watch short-form video coverage and participate in interactive discussion forums, all across both PC and mobile platforms.

Our performance on the mobile side during this time was especially impressive. A report by the independent mobile internet research firm, Talking Data showed the following. First, during the World Cup, the DAUs on Ifeng news apps increased by 21.3%; second, the application is currently among the top three users most preferred apps in the news app category; and third, our Ifeng mobile website shows promising growth with DAUs increased by 31% during the World Cup.

Additionally, in an effort to extend the reach of our brand and connect directly with users and potential users during this exciting time, we launched several marketing and promotional events in Beijing's nightlife and bars districts. These World Cup scene promotional events allows us to reach over 1 million people directly and extend our social media powers to over 10m.

The second quarter also witnessed the elevation of our video brand, characterized by the strong performance of new video company platform. We began to air several new in-house productions that were well received by both advertisers and the public. The Match of Taste, our new original food show offering -- introduced Ifeng video in May, achieved a record high 22 million viewers per episode.

Now, moving onto our second quarter earnings highlights. In the second quarter financial results we saw steady topline growth and impressive net income expansion. The incremental revenue growth and operating margin improvement were largely supported by the strong performance of our net advertising revenue which grew by over 38.9% year-over-year. The success on advertising side was driven by the rapid growth of traffic across our PC platform, as well as the successful integration of marketing solutions and emergence of our native advertising solutions.

The evolving dynamics of internet advertising have drawn our attention towards native advertising and native markets. To focus on this evolution, we recently helped established the native Marketing Research Institute for the purpose of exploring and tailoring native app partnerships and have already seen multiple successful cases impetus thus far. We're optimistic about our native advertising offering as we build it into our overall integrated marketing solutions for advertisers. The impressive ad revenue growth in the second quarter coupled with the recent initiative to consolidate our marketing and sales resources will set the stage for continued growth in brand building, marketing events and advertisement sales. We're excited to promote Ling Jin, formerly Executive Vice President to CMO in part of this new team.

We're also happy to promote Ya Li, formerly our COO and long-time Ifeng veteran to President. And welcome onboard our new CTO, Richard Tong. The rapid reorganization of our team and resources will help boost morale, improve efficiency and foster greater innovation in terms marketing solutions integration and the product development.

Before I conclude my remarks, I also would like to provide you with an update on ongoing convergence between Ifeng and the Phoenix Satellite TV, as it has been almost six months since I assumed the CEO role of PTV.

First, in recent months we began to cover many news events from Malaysian flight incidence to the rampant corruption storm in China. With PTV providing comprehensive and timely news reports in order to enrich our content offerings and improve user selection on multi-screens.

Second, Ifeng has become more involved in PTV's content production process by co-producing and co-broadcasting the content on both TV and internet platforms. Two of our recent in-house productions, the Match of Taste and [indiscernible] have been co-broadcasted in cooperation with PTV in the second quarter. Currently, PTV is in the process of revamping its major programs. We are aiming to import more internet creative ideas into TV programs to enhance the interactive functionality of the new programs and further expand PTVs different age demographic in mainland China.

Third, we continue to progress in terms of technical integration across the Company platforms in order to further improve content management efficiency.

Last, we tend to hold a series of co-marketing events together with PTV in the second half of this year. Such events include the Phoenix financial forum and economic leader award to be held in Q4 2014. These significant developments demonstrate the tangible progress that has been made on the convergence of the Phoenix Group's media resources. Leveraging this success in second quarter and fueled by a large PC and mobile audience, we are excited to hop in to the second half of 2014 with strong momentum. With the growing demand of lifestyle oriented mobile and video conference, we are confident that Ifeng's converged multi-screen platform will continue to grow as we expense its footprint with the new media industry.

With this, I'll like to turn the call over to our CFO, Betty Ho.

Betty Ho

Thank you, Shuang and thank you all for joining our conference call today. As Shuang mentioned earlier, we have very strong first half of 2014 both top and bottom line mid-market consequences mainly due to our strong growth of advertising revenue.

Now let me take you through our financial highlights for the second quarter of 2014 results. The amounts mentioned here are all in renminbi unless otherwise noted and all numbers are mentioned here are non-GAAP adjusted numbers. The difference between GAAP and non-GAAP are the adjustments of the share based compensation. Gain on this position of subsidiaries and acquisition of equity investment and loss from equity investments.

Ifeng total revenue for the second quarter came in at RMB410.9 million. Adjusted net income attributable to Phoenix New Media for the second quarter was RMB92.3 million or RMB1.19 non-GAAP net income per diluted ADS.

Going into details, starting with revenues. Net advertising revenues for the second quarter came in at RMB291 million, which represents a solid year-over-year growth of 38.9%. Average revenue per advertiser or ARPA increased by 23.8% to RMB0.9 million and advertisers number increased by 12.2% to 231. Paid service revenues for the second quarter was RMB119.9 million, which represents a year-over-year decrease of 22.5% mainly due to the decrease of mobile value-added services which was in line with our expectations earlier. Mobile value-added services revenues decreased by 30.7% to RMB91.1 million. Games and others' revenue increased by 24.2% to RMB28.8 million due to the increase in games revenues.

Secondly, gross profit and margin. Adjusted gross profit for the second quarter of 2014 increased by 12% to RMB215.8 million. Our adjusted gross margin for the second quarter was 52.5%, which remained about the same as in the previous period in 2013.

In terms of cost of revenues, there are four components. Revenue-sharing fees relating to paid services, content and operational costs, bandwidth costs and sales tax and surcharges. As per revenue-sharing fees as a percentage of total revenues decreased to 14.4% from 18.7%. Content and operational cost as a percentage of total revenue increased to 19.8% from 17.1% mainly due to the increase in staff related costs and cost of content production related to advertisement. Bandwidth cost as a percentage of total revenue decreased to 4.9% from 5.6% mainly due to the improved bandwidth efficiency obtained through updated bandwidth management technology.

And lastly, sales taxes and surcharges as a percentage of total revenue increased to 8.4% from 5.8% due to the increase of net advertising revenue and the transition from business tax to value-added tax which became applicable to Ifeng's starting from June 2014 as Ifeng is deemed to be in the telecom industry under applicable tax regulations.

Thirdly, adjusted operating expenses for the second quarter increased by 8.9% to RMB126.3 million. The increase in operating expenses was primarily attributable to the increase in staff-related expenses associated with the Company's marketing and promotional initiatives. Adjusted operating income for the second quarter increased by 16.6% to RMB89.5 million. Adjusted operating margin for the second quarter improved to 21.8% from 21.1% in the same quarter last year.

Fourthly, adjusted net income attributable to Ifeng for the second quarter increased by 10.4% to RMB92.3 million. Adjusted net income per diluted ADS for the second quarter increased by 10.3% to RMB1.19.

In terms of balance sheet items, in the second quarter of 2014, the reclassification of certain highly liquids principal guarantees in investment products reported as cash and cash equivalents in the previous period was reassessed. And it was determined that these products should have been classified as term deposit and short-term investments to partly reflect the nature of these assets. For the details about those products and classification adjustment, please refer to our Q2 earnings release.

The classification adjustments had no impact on our consolidated payments of comprehensive income or the line items of our consolidated balance sheet other than cash and cash equivalents and term deposits and short-term investments.

As of June 30, Ifeng's cash and cash equivalents and term deposits and short-term investments was RMB1.4b or approximately $225 million.

Turning to share repurchase program. As of June 30, the Company had repurchased an aggregate of 109,563 ADS. At an aggregate cost of approximately $1.2 million, on the open market pursuant to the share prices program approved by the Board in May 2014.

Lastly, I'd like to provide our business outlook for the third quarter 2014. We are forecasting total revenues to be between RMB402 million to RMB422 million, representing an increase of 6% to 11% year-over-year. For net advertising revenues, we are forecasting between RMB307 million and RMB317 million, representing a growth of 37% to 42% year-over-year.

For paid services, we are forecasting between RMB95 million and RMB105 million, representing a decrease of [39%] to 32%.

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]

Your first question comes from the line of Alan Hellawell of Deutsche Bank. Alan, please ask your question.

Alan Hellawell – Deutsche Bank

Thank you very much. Hi guys. Just a few questions.

First one, if I have my numbers right, it looks as though ARPU in the second quarter declined roughly 5% to RMB880,000. I was just looking if you could add some context around that. And also related to that, just give us a sense as to how much you're increasing your ad rate. And ideally, maybe this is too granular, how ad rates are trending across PC video and mobile. So that's one question.

The second question is, your sales and marketing was -- in the second quarter was significantly below our expectation. I know you gave a little bit of color there, but we'd love to get any further detail. And then we'd also love to get an update on native advertising, what the CPM gap now is and where we are in rolling that out. Thank you very much.

Ya Li

Hi Alan, this is Ya. Thanks for the question.

The first one about the ARPA, sequentially we do have a slight decrease from the first quarter to the second quarter, mainly because we did grow new advertisers significantly in the second quarter. However, when we look at the existing ad clients, the ARPA for that still showed a growth. But the new customers generally have a lower ARPA compared to the older clients. That's why overall ARPA showed a slight decrease sequentially. But if we compare to the second quarter of last year, the both ARPA and number of advertisers grow I think at a good rate.

And talking also you asked about the advertising pricing. In the beginning of the year, we did grow our -- we did increase our PC average by 20% for the A-plus ad inventories. For the second half, we expect that to increase by 5%, so A-plus ad inventory on PC. For the mobile side, we expect mid-double digit growth rate increase in the second half and for the video, we also expect about a 30% rate card increase in the second half.

And I think Betty will answer the S&M spending about the second quarter.

Betty Ho

Hi Alan, this is Betty. As quarter sales and marketing margin as for last quarter, it was 17.2% [ph]. As compared to the previous quarter, it was 20.9%. It was mainly due to the reason that we have delayed the launch of our mobile games, without delaying the related promotional cost. And secondly, also for promotional expenses on mobile internet for our apps and web was also being pushed forward to the third quarter. As a result, you can see that we have a lower sales and marketing expenses as compared to the previous quarter. However for the coming quarters, you will see that going back to the normal level.

Ya Li

Okay. And Alan, again, back on native marketing and native advertising, we did continue to observe this big trend in both U.S. and China. I think native advertising for a new stage of content marketing is borne out of the continuous information overloading and also the expanding usage of multiple devices by consumers.

Also it's in line with our strategy of big data plus big idea is on the content insight, the consumer insight. And we can provide truly valuable and branded contents to the consumers in a format integrated, better integrated with overall advertising environment.

We did rely on the native marketing to help us to make some breakthroughs in certain industries, especially for example the FMCG sector which is traditionally a weak sector for us. However, I think native advertising and native marketing campaigns helped us to gain percentage in that sector with the I think general slow or decreasing ascending for other internet companies.

And the adoption of the native marketing is truly cross-devices and it reflects our ability to rely on the in-house created insight and native marketing material to help the consumers from all different devices to truly consume the content and the messages associated with a brand. And the contribution for our advertising revenue growth or the percentage of native marketing part of our overall advertising revenue is now already double digit.

And however, we are also experimenting the native advertising format, especially the in-stream advertising format on mobile applications and mobile website, which might be more scalable compared to the greater native advertising campaigns that mostly used by the bigger clients. So the in-stream native advertising formats can be used the smaller or the medium sized clients or in addition to the native marketing campaigns. And so we are exploring this in both mobile in-stream ad formats and also the native marketing video campaigns. So it's truly cross-devices.

And we are also trying to control the cost associated with generating customized native marketing campaigns. However, we believe this is a general trend for the industry and we can rely on our content advantage to capture this bigger trend of marketing and advertisings evolution.

Alan Hellawell – Deutsche Bank

Really, really helpful responses. Thank you very much.

Operator

Your next question comes from the line of Alex Yao of JPMorgan. Please ask your question.

Alex Yao – JPMorgan

Hi. Good morning everyone. Thank you for taking my questions. I have a few quick ones.

Number one is, can you guys give us an update on your mobile strategy, particularly on the monetization?. What is the difference of monetary vision between web and app inventory now and how do you think about the future potential. And then I have a follow-up question. Thank you.

Shuang Liu

Yeah. Hi, Alex. This is Shuang. Let me answer the first part of the question. The overall wireless strategy, as we -- as I said in my opening remarks, we are very encouraged by the very robust growth of CapEx on both app side and wireless web side. Right now we have a nice portfolio of wireless assets. Our Ifeng FM which still adds a product development stage and our web which makes huge contribution to our advertising sales and also our wireless video apps which focus on the news and documentary related short video forms.

And the first one, our Ifeng news apps, which are going to be our flagship wireless product, this is going to be our strategic focus. Our idea is not to simply make all these apps a simple replica of our PC portal. It's going to add many new innovative features like in terms of user format, the content push, personalized content push through data mining and LBS and also a lot of interactive features. And also we're going to adopt technology driven rather than add driven content aggregating methodology. And also, we're going to bring in performance based advertising model later on.

So this is going to be an innovative product. We're going to invest more in this area. We feel very comfortable with our traffic growth recently, especially in the last two months. So we're looking forward to make it a next generation wireless portal, jump-start our old wireless strategy. And also we're going to be flexible and open minded in terms of looking at other investment opportunities to further supplement of our existing wireless business line.

As to the monetization, probably Ya will spend a few minutes.

Ya Li

Yes. Hi Alex. Yes, mobile monetization I think is key for future revenue and profit growth. And first of course is through advertising. We indeed observed the mobile advertising contribution grew from 8% a year ago to 13% in the second quarter of this year. The growth rate was 138%, even higher than our own expectation. And the advertising, we have different strategy in terms of our advertising monetization web versus apps. On the mobile web, web pages, I think because of the very large DAUs and we are actually relatively monetize more aggressively. Whereas for the mobile apps, we are still focusing on user experiences and to grow the DAUs and leaving greater potential for future monetization. And however, we do have both platforms in advertising solution services.

And in addition to advertising, I think the gain is also very important for mobile monetizing in the future. We are spending quite some time and resources in exploring mobile game operation and including exclusive game licensing and also joint third party development and we realize this may take some time. And also there is greater uncertainty compared to the PC game operation, which did exhibit a single digit growth this year as the industry in general moved towards mobile platform. And I think we are spending more in terms of R&D and also I think in the second half of this year, some S&M costs associated with mobile games. And we do not expect meaningful revenue contribution, however, probably much later.

And in addition to this, to also exploring some other O2O and e-commerce opportunities to better monetize the mobile traffic and mobile audience. And overall I think the income level, the purchasing power of Ifeng audience actually do supports their spending in terms of both game and also ecommerce. As if you noticed that, the ecommerce contribution I think grew tremendously in this second quarter as percentage of overall advertising revenue.

Shuang Liu

Also Alex, this is Shuang, let me also add that, in terms of the traffic split between web and news apps, right now I can't -- we can't disclose the details. But I could say at the present stage, web contribution in terms of traffic is more than apps, but the gap is [shorting].

Alex Yao – JPMorgan

Very helpful. Second question is on the advertising business second half outlook, can you guys comment on the advertising sentiment, vertical [ph] performance and outlook, etc.? Thank you.

Ya Li

Okay. Yes. I think, first, I think depending on the different industries and different clients, currently we do not observe general like market sentiment of significant change from old expectations. But for each individual sectors I think it's all different.

For example, for the auto sector, which is a major sector for all the quarters [ph], we did notice that the domestic brands sales figures were relatively weak in the first half. So it's -- creates challenges, and also opportunities, because they have to change their existing, their old way of marketing and advertising. And we are realizing we are relying on native marketing approach, strategies, to help us to gain more market share.

We did grow our auto market share from 27% in the first quarter or 28% in the second quarter of last year, to 33% of -- this quarter. So this sector is mixed. I think it's a little weak for general, but for us it's neutral because of our native marketing campaign.

And also then, when we look at the e-commerce sector, we observe there are already some major established big e-commerce brands this year competing more aggressively against each other, and also with Alibaba's upcoming IPO, I think they're -- and also some IPOs from [indiscernible] etc. I think we see benefit from this, and I think the whole industry is bullish on I think the advertising spending from e-commerce companies. And especially when we demonstrate our audience purchasing and the true ROIs measured beyond the click-through rate but the actual purchasing, the value contribution to their marketing and advertising campaigns. And that's why we grew the e-commerce contribution to only 9% in the second quarter last year to 14% of -- this quarter.

And also for FMCG, we noticed that there were some scandals for the big multinational FMCG companies recently and their spending I think have been reduced a little. And for us, I think we did experience some I think slowdown in terms of Chinese wine advertising spending, because of the overall government policy I think in China. Beyond that, I think there is also financial service sector, and driven by the internet finance, I think this new business opportunities we did see some potential in financial service ad spending.

And for real estate, of course there's a major challenge for us because of our joint venture or our vertical approach of real estate sector. We did see real estate for the first time become our top five contributors, accounted for 4% in the second quarter.

So overall we think the macro economy or the general sentiment for ad spending across all industries is quite mixed. It all depends on each individual sector and also each different media itself. That's why I think we will explore more native marketing and native advertising approach to meet this challenge and to take market share from this changing environment.

Alex Yao – JPMorgan

Very helpful. Thank you very much.

Operator

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

Unverified Participant

Hey, good morning. This is George calling on behalf of Philip. Thank you very much for taking my question. I have a couple of questions.

First one is regarding -- basically a housekeeping question. Can you remind us of your video ads revenue contribution in this quarter? And when you said that 13% of the ad revenue is coming from mobile, does that also include mobile video? And also, can you just give us some rundown for the top categories. I know you already mentioned some, but can you give us a full list of the 12 categories and their contribution in this quarter?

Ya Li

Okay. Yes. Okay. Thanks, George.

Yes, the video advertising accounted for 14% in the second quarter of this year, which is same as second quarter of last year. The growth rate for video advertising was 34%. I think -- I believe that's a rate still much higher than the general I think PC portal growth rate.

I think the -- we didn't see increase in video ad contribution, because in the second quarter I think most of the video budgets for many advertisers were spent on World Cup associated videos. Despite of our World Cup products such as on the mobile and original content, relatively speaking, we still have less advantage compared to other sites who spend money to purchase the World Cup, you know, the game videos, broadcasting rights. That's why I think the video contribution stayed the same as the year ago.

And the top five sectors for the second quarter ad revenue is, for auto, accounted for 33%, e-commerce 14%, food, beverage and wine 8%, medical service 8%. And then for the financial service and real estate, each accounted for 4%.

Unverified Participant

Okay, got it.

Ya Li

Yes.

Unverified Participant

Yes. And then I also want to follow up on the outlook, advertising outlook for the second half of the year. So you mentioned that, in terms of the rate cut increase on PC, it's only about 5% in the second half versus like 20%. Does that imply that the PC advertising revenue growth is expected to be slower than the first half, especially advertisers may not choose to move their budget to mobile? And also, although you already have very strong vertical on PC, does the overall trend still go from PC to mobile which may actually cause slowdown on the PC advertising?

Ya Li

I think yes and no. When I say no, is if you look at the guidance for third quarter advertising revenue, I think the overall growth rate was -- we guided is 37% to 42%, which I think is no less than the second quarter growth rate of 39%.

When I say yes, I think the general trend is that we are seeing greater growth rate on the mobile side. And in fact, that's why we mentioned that we didn't service 138% growth on our mobile advertising revenue growth.

Our PC ad revenue still is a major contribution to our overall ad revenue, and we did see more than 20% DAU growth on the PC side. We are still taking market share from the other competitors, within this macro trend of PC to mobile migration. I think, however, I think we do not expect the PC advertising revenue to -- growth to accelerate even with our native -- marketing and native advertising approach because of the over -- the background of the overall industry trend. But we do hope that native market approach will help us take market share against competitors.

On the mobile side and on the video side, I think the key for now is to grow our DAUs to reach a scale similar to what we have on the PC, and also to develop new advertising products and also to better monetize on the mobile traffic.

Unverified Participant

Okay, great --

Ya Li

I don't know if that answers your question.

Unverified Participant

Yes, sure. And my last question is regarding your paid service on the third quarter guidance. Can you give us more color on the granularity of the guidance? I think the gaming [indiscernible] is doing good, but then the -- which part of the MVAS is especially weak? Is this digital reading [indiscernible] going down faster than expected?

Betty Ho

Well -- hi, George. This is Betty. For paid services, there are several components under the paid services. The majority one was the revenue generating from wireless value-added services, and then the mobile video and mobile reading, like digital reading. And then the fourth component will be the games and others.

So in terms of the wireless value-added services and mobile reading and digital -- mobile video and digital reading, we have guided down last quarter at an average about 23%, and the decrease was in line with our expectations.

Due to the, as we mentioned during last quarter, the changes of revenue sharing ratio and the change of the VAT from business tax, and also actually due to the tightening of the market condition because of the anti-pornography campaign, and this quarter we are not seeing the conditions getting any better. Actually it was -- it has been continuing to be a very difficult situation on the wireless, especially on the mobile video and wireless value-added services. I think it's also in line with the industry.

So this year, despite of the fact that we have to increase in games revenue on web games, but as Ya also mentioned earlier, mobile games has been -- is at investment stage. We are also actually testing the market. So -- and I also mentioned earlier that we're prepared to launch one of the games in second quarter but it was delayed to third quarter. And there are around three more mobile exclusive license games in the pipeline.

So looking forward, despite of the decrease in wireless value-added services, we hope that the increase of the mobile game revenue will be offset part of the decreases from the wireless value-added services.

Unverified Participant

Okay, great. That's very helpful. Thank you.

Betty Ho

Thank you.

Operator

Your next question comes from the line of Jiong Shao of Macquarie. Please ask your question.

Jiong Shao – Macquarie

Hi. Thank you for taking my questions. I have a couple of questions as well. The first question is to follow up on your comment on mobile games. You mentioned earlier that there have been delays in launching your mobile games. Could you talk about some of the reasons for the delays? And also, could you elaborate a bit on your mobile game strategy? Are you going to be CP or publisher or whatever the business model you're pursuing in the mobile game area? That's my first question.

Ya Li

Okay, thanks, Jiong. I think, yes, we are very -- this is very early stage for our mobile game operation and we did plans to launch a couple of mobile games in the second half of this year. And we are in the operation preparation stage at this time for a couple of these games, including -- some including games license from Korea, South Korea, and also produced domestically by third-party companies. We're also investing in some internal game development. However, I think overall, I think our role will be mostly publishing platform operation rather than a CP at this stage.

And the -- I think it's -- overall there is a lot of uncertainty in this area as we were mostly online media company in the past. That's why this uncertainty makes us to make very I think careful, I think, expectations in terms of mobile operation and impact on the overall -- the top line and bottom line.

And the S&M cost will not happen, unless the testing experiment [indiscernible] of the games show great potential. That's why I think we are still in good control of the bottom line impact. But we do hope that the mobile games will become a major revenue -- monetization channel for our mobile traffic in the future and overall to improve our paid service revenue quality and category.

Jiong Shao – Macquarie

Okay, thank you. So could you please also comment on some of your game pipeline for mobile, like how many mobile games -- I think you mentioned a couple of mobile games later this year, how many mobile games to launch next year? And how are you going to promote these games if you act as a publisher?

Ya Li

Yes. At this time we cannot predict the plan for next year. I think we are focusing on -- it will depend on the results also first on how we -- after these three games, we plan to launch later this year. You know, that's why I think our financials right now doesn't include too much impact, especially on the top line from that gaming business.

Jiong Shao – Macquarie

Okay, thanks. My second question is on the further monetization of mobile. I think you highlighted earlier that the O2O and e-commerce may be the next step to monetize. I suppose you do not mean just doing advertising for the e-commerce. I guess you meant probably get a bit more integrated either as an e-commerce marketplace or via e-commerce player yourself I suppose. Would you be able to elaborate a bit more on the O2O and e-commerce monetization on mobile if possible?

Ya Li

Okay. I think this trend is not only applicable to mobile but also to PC and video business. For example, let me talk about this, for video, we did produce and are still producing two series of original video programs in the food segment. The first series was called Match of Taste and the second one is Search of Taste [Chinese language spoken]. And for these original productions, in addition to advertising sponsored advertiser and also preloaded -- pre-rolled video advertisement, we also experimented with mobile apps associated with these two video productions, as well as some O2O partnerships with other e-commerce companies.

I think these -- because I think the true trend went from the marketing. I think of course the major trend is through performance-driven. And also as a publisher, we are also trying to develop marketing solutions to reach deeper our cooperation with the clients business model and revenue model beyond just brand enhancement, as this approach will continue. That's why I think the e-commerce and O2O experiment is important for both PC and mobile and also for the video side.

And especially for the mobile, because of the better personalization capacity from the mobile apps and also for example the low LBS feature and also Other Smart Recommendation feature, we will be able to provide more performance-driven and also sometimes partnership campaigns with certain clients.

We already started this with some of these -- some clients even on PC in certain industries. For example, in home electronics sector, we did experiment with one major client in the -- in July, and we think we will learn from these experiments and make more of the O2O and e-commerce experiments future across our platforms.

Shuang Liu

Hi, Jiong. This is Shuang. Let me add that, speaking of our mobile monetization strategy and O2O opportunity, this has a lot to do with our mobile product strategy and our vertical strategy. Actually as I mentioned in my opening remarks, in my previous answers, news apps is in a transformation period. It's not going to be a simple graphic of our PC [indiscernible]. You cannot add many new features like content push through data mining and LBS. And there we'll try news feed advertisement later on. So there's still a lot of opportunity for performance-driven app like Ya mentioned.

And also as all you know that our vertical like real estate, fashion, entertainment and finance has very high ranking, have either number one -- entertainment has number one [among all these] portals, fashion number two ranking, and auto and entertainment number three and number four rankings. Very high ranking. But we're still at the very stage of monetization.

So our next step is to emphasize the model first, emphasize the product first, so, further enhance our user stickiness, this will enable us to try performance-based advertisement and to try the O2O opportunities. But it's got to be a process.

Do I answer your questions?

Jiong Shao – Macquarie

Sorry, I was on mute. Yes. Just a quick follow-up if possible. When should we expect a real monetization on your mobile app? And when you mentioned earlier about customization of your mobile app, would you be able to target like some of the competitive products out there, target type of news you'd push to individual users based on their reading sort of record in the past? That's all. Thank you.

Ya Li

Yes. We will be able to I think provide that capacity for better targeting. And also in terms of timing, I think right now we already started to monetize those apps, it's not just -- compared to the mobile app advertising revenue, contribution is small. We do expect the better targeting capacity, the better revenue contribution I think next year.

Jiong Shao – Macquarie

Okay. Thanks a lot, Shuang and Ya.

Ya Li

Thank you.

Shuang Liu

Thank you.

Operator

Your next question comes from the line of Natalie Wu of CICC. Natalie, please ask your question.

Natalie Wu – CICC

Hi, good morning, Shuang, Ya, Betty and Matthew. Thanks for taking my question. I have two questions if you don't mind.

The first one is just wondering what is the effect of World Cup in the second quarter, and how much would they contribute to the ads revenue in the third quarter?

And I also have a quick question regarding to your third quarter guidance. You just mentioned that the wireless value-added service has some decline, so, could you give us some further outlook on this business unit, and how would they go in the future? Will it continue to strength or rebound [indiscernible] [strength], how could we predict the pace? Thanks.

Ya Li

Okay. [I'll take the first question]. First of all, the World Cup contribution, I think, World Cup contribution really is mostly from the audience, new audiences, because of our sport content and both in terms of text, picture and original video production, we have very limited purchased content compared to the other video and portal sites for World Cup. And so the revenue contribution is also rather limited. It's just, you know, if I have to give a number, I think it's just about RMB10m or a little more than RMB10m. It's much smaller than some other major events for us, for example, the National Congress of People's -- National People's Congress in March.

So -- but also, we are also preparing for other types of monetization associated with sport events, learning from what other companies are doing during that period. We hope to have more to disclose later this year.

Betty Ho

Hi, Natalie, this is Betty. As regards to your wireless value-added service -- paid service question, I actually responded to this earlier to George's comment. But in short, actually the paid services we have guided down about -- from 32 to 39 degrees.

So, due to the market condition, because the market condition didn't get any better last quarter nor at this quarter, but hopefully in the long run, we are looking at our mobile games, is the revenue generated from mobile games will be offset by the decrease -- part of the decrease of paid services.

Natalie Wu – CICC

Okay. Thanks very much.

Operator

Your next question comes from the line of Joyce Zhou. Joyce, please ask your question.

Joyce Zhou – Analyst

Hi. Good morning, management.

So my first question is actually, previously you talked about that you may look at other investment opportunities in the mobile area. Can you specify what kind of verticals or kind of products are you interested? Thank you.

Ya Li

Yes. We are looking at areas where the type of content, especially services and products, fit well with the demand interest of our audience. Our audience are generally more mature, with higher spending power, generally have a family, with kids, and so that's what we are looking from, parenting to baby care, to, we mentioned, food, to cosmetics, to education, to travel, and also to sports. In terms of sports, I mean like exercise or not, you know, sports watching but rather a sport activity, so. And healthcare, and also even for the real estate, new segment of [indiscernible] in real estate.

So it's cross all different lifestyle and consumption segment. But the criteria is that it has to be some new original initiative without existing dominant player. Secondly, it fits well with our audience demand. And thirdly, we can rely on our large user base and Phoenix brand to help the business to grow.

I think the investment is a very important approach for us to accelerate our growth, especially at this stage with internet entrepreneurship is driven by a lot of [indiscernible] and also strategic investment and M&A activities. And Ifeng, as profitable a business compared to many of the other video or portal sites, and we as a profitable business and with I think enough cash reserve, our acceleration of our efforts in terms of strategic investment and strategic cooperation.

Joyce Zhou – Analyst

Thank you very much. And may I have another question? It's about your new advertising customer acquisition strategy. So you mentioned that in the second quarter the World Cup helped you acquire some new customers, and also the native advertising. But going forward, do you see any like great opportunities for further increase the number of advertisers?

And also associated with that is the ARPA trend. Could you give us some guidance? Because you mentioned also that adding new advertisers, the ARPA kind of a bit lower than the existing advertisers. And what's the overall trend do you see going forward? Thank you.

Ya Li

I think the growth of ARPA versus number of advertiser will be mostly balanced in the future. The native marketing strategy will help us to gain -- both gain bigger campaign and budget from existing customers. It also will help us to make some breakthroughs, penetrate into some segments such as FMCG.

However, I think as -- in general, I think new clients ARPA would be lower than existing clients. I think the most important strategy for growing our advertisers is through vertical expansion into more lifestyle and [indiscernible] oriented verticals. And also secondly, our cross-device, cross-platform marketing campaign will also help us reach to provide marketing -- integrated marketing solutions in an environment where people mostly consume information across a couple of devices.

For example, for the tablet, with the pad -- pad usage in China expected to grow, we do expect to have new advertising solutions both for -- targeted for pad users and also for the -- as an integral part of marketing solution.

Joyce Zhou – Analyst

Thank you very much.

Ya Li

Thank you.

Operator

There are no further questions at this time. Please continue.

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 good day.

Operator

Ladies and gentlemen, this concludes the call for today. Thank you all for participating. You may all disconnect.

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