on 8/8/13, Phoenix New Media ("[[FENG]]", or "the Company")
reported two consecutive quarters of strong earnings. The market's
response to each earnings release was surprisingly divergent. After
crushing 2Q 2013 EPS estimates, FENG's share price rose 7.42% to
$9.07 on its way to a 52-week high of $13.38. And yet, after
similarly exceeding 3Q 2013 EPS estimates, FENG's share price fell
11.23%, although it has rebounded a bit since then. We believe the
market's response to Q3 earnings shows how poorly the majority of
investors understand FENG's strategy and what really matters to the
Amid the post-Q3 sell-off, the market missed the most important
takeaways from FENG's results:
- Continued strong market share gains in an environment where
others are doing well to just maintain share
- Strong growth in pricing and number of advertisers, which
point to additional momentum in 2014
- Momentum in mobile and online video, the two most
strategically important segments of FENG's overall business
- Transition away from the low-margin legacy 2G business to the
higher-margin mobile advertising, online video, and online gaming
I. 3Q 2013 Results Review
Perhaps the most important point to consider when analyzing the
quality of FENG's quarterly reports is that not all revenue should
be valued the same way. As discussed in our
, we view FENG as having a high-growth business and a legacy
business (2G feature phone-driven revenue) that we liken to a
slowly melting ice cube that will contribute earnings and cash
flows until it fully transitions (to 3G smartphone-driven revenue).
Clearly, revenue contributed by the legacy business should not be
valued anywhere near as highly as the rest of FENG's revenues.
Keeping track of this transition and the continued momentum in
FENG's high-growth business is one of the keys to measuring the
FENG reported 3Q 2013 sales of RMB 378.7 million, near the high
end of its guidance of RMB 367-382 million and Bloomberg consensus
estimate of RMB 378.4 million. Most importantly, the Company
strongly beat its Net Advertising revenue guidance of RMB 207-217
million, reporting Net Advertising revenues of RMB 223.8 million
(59.3% YoY growth). Weakness in its least important business,
legacy 2G, resulted in Paid Services revenue of RMB 154.9 million,
lower than the previously guided RMB 160-165 million.
Margins continued to expand, helped by ad rate card pricing
increases, mix shift away from 2G sales, and lower bad debt
expense. Reported non-GAAP EPS was RMB 1.06 vs. Bloomberg consensus
estimate of RMB 0.73.
Bloomberg Error Causes Sharp One-Day Drop
Of note, even though FENG beat earnings expectations by ~45%,
Bloomberg initially reported incorrectly that FENG significantly
missed estimates, confusing the majority of investors who are not
close enough to the Company's numbers.
(click to enlarge)
Bloomberg's error, which triggered a one-day double-digit
sell-off, was only corrected the subsequent day, but the delayed
reaction to the actually strong earnings that drove the share price
back to where it was failed to improve it.
Although 4Q 2013 sales guidance of RMB 368-378 million was just
shy of Bloomberg consensus estimate of RMB 385.8 million, more
importantly, the Q4 Net Advertising revenue forecast of RMB 244-249
million was higher than most expected (e.g. Morgan Stanley's
forecast was RMB 231 million). Paid Services revenue guidance
continues to be weaker than expected as the 2G business
transitions, with the Q4 forecast of RMB 124-129 million trailing
most sell-side estimates (e.g. Morgan Stanley expected RMB 150
million). In other words,
FENG is executing beyond expectations as the legacy
transition occurs faster than anticipated by the sell
II. Key Takeaways
We note the following important takeaways that the majority of
investors focused on overall headline numbers appear to have
1. iFeng.com continues to gain market share from its
While most other portals continue to report flat or declining PC
user traffic, FENG is seeing strong double-digit growth in its
flagship property. Importantly, iFeng.com has strongest share in
China's most developed Tier 1 cities, where all of its competitors
are also strongest and overall Internet growth is weakest (relative
to more underdeveloped lower-tier cities that represent future
growth opportunity). Tier 1 city-focused third-party research firm
iResearch noted daily unique visitors to iFeng.com grew 20% YoY to
40 million in September 2013. The following charts from a JPMorgan
research report illustrate the consistent traffic growth
(click to enlarge)
Most notable about iFeng.com's traffic growth is the manner in
which FENG generates it. Traffic is increasing due to improved
product features and user experience which are driving viral
referral and increasing loyalty, as opposed to incurring
incremental user acquisition cost through paid marketing.
FENG's differentiated content continues to drive share gains
from larger portals such as SINA and SOHU, as evidenced by the
sharply higher portal growth rate FENG enjoys. Going forward, we
believe the relative value of content will be even more pronounced
as the leading Internet incumbents battle to retain share, with
much of the value creation accruing to companies with compelling
differentiated content. The global history of media has
consistently shown that monetization always follows eyeballs and we
believe the trend in China's Internet will be no different.
iResearch recently ranked FENG sixth in terms of monthly unique
users among its peers. This illustrates why FENG is compelling as a
long-term investment. It is, both a leading traffic share gainer in
monthly unique visitors and user time spent, as well as the company
with the lowest market value ascribed to its users.
(click to enlarge)
2. Strong growth in pricing and number of advertisers,
which point to additional momentum in 2014
The strength of FENG's differentiated content throughout the
three dominant digital channels: mobile, video and PC-manifests
itself in traffic share gains and large increases in advertisers,
both of which will ultimately result in sustained pricing power. No
other major media company in China can offer a combination of TV
(which FENG can offer via parent company Phoenix TV), Web, mobile,
and online video exposure, certainly not at the scale that FENG
The table below illustrates how average revenue per advertiser
(ARPA) has increased YoY for
publicly disclosed quarter.
(click to enlarge)
3Q 2013 ARPA grew 13.8% YoY, but declined sequentially due to
historical 3Q seasonality and the large increase in new
advertisers. New subscribers tend to ramp up ad spending over time
and FENG had the strongest YoY growth (40%) in advertisers since 1Q
FENG's management team has historically focused on gaining share
of advertisers by offering substantial discounts relative to other
top display advertising competitors such as SOHU and SINA, which
has allowed the Company to quickly gain large advertising customers
across a variety of high-growth consumer segments. As FENG's
customer base grows, the management team has slowly started to
increase prices closer to their fair market rates.
In 2013 YTD, FENG has increased its premium PC ad rate
twice (15% on January 1, 2013 and
% on July 1, 2013), video ad rate once by 48% and its
mobile ad rate 3 times (once each quarter).
Management noted on the earnings conference call that they
expect continued increases in the number of advertisers and ARPA.
They specifically discussed how the CPM rate for iFeng.com's cover
page will increase significantly, which is a sign of FENG's growing
influence and prominence.
The frequency and magnitude of FENG's price increases bring to
mind a famous quote by Warren Buffett:
The single most important decision in evaluating a business is
pricing power. If you've got the power to raise prices without
losing business to a competitor, you've got a very good
Despite substantial and frequent price increases in 2013, FENG
is gaining market share versus its competitors, which suggests that
FENG is a very good business indeed.
3. Momentum in mobile advertising and online
FENG has continued to report hyper-growth in mobile advertising
and online video, two segments that are increasingly important to
both domestic and multinational advertisers and, therefore, also to
As content consumption via mobile devices continues to overtake
that of the Web, the single most important strategic imperative for
content publishers is managing that transition. FENG's 3Q 2013
results indicate that FENG is managing the transition seamlessly:
Mobile consisted of over 1/3 of the Company's total traffic, with
22 million daily active users (vs. over 39 million DAUs on PC-based
ifeng.com). Daily users of FENG's mobile news app grew 400% in
August 2013, per iResearch, albeit, from a low base. Furthermore,
mobile advertising sales growth accelerated to 160% YoY, compared
to 159% YoY growth in the 2Q 2013. On the 3Q 2013 earnings
conference call, management disclosed that mobile advertising is
now 10% of total ad sales and they expect FENG's growth rate to
lead the industry.
FENG's video ad sales also accelerated and rose to 16% of total
ad sales in 3Q 2013. Profitable FENG is now growing faster than
industry leader Youku Tuduo (
) which has yet to turn a profit. YOKU's 3-4x premium on EV/Sales
The launch of 4G LTE networks next year by China's three telecom
carriers will spur increased mobile video consumption. Due to slow
broadband and lack of access to mobile data usage, viewers in lower
tier cities tend to download videos onto their phones when they
have access to Wi-Fi. They then watch the videos at a later time
instead of streaming through mobile broadband. As videos downloaded
in this manner do not carry advertisements, faster mobile broadband
will increase monetization of the entire online video industry.
FENG's video platform is well suited for small-screen consumption
with higher ad frequency, given its emphasis on professionally
edited short form news clips.
According to the "China Mobile Internet 2012 Review" by Umeng,
China's largest mobile app analytics platform, video apps had the
highest growth by far amongst app categories. A mobile user's
average total time spent daily on video apps increased 259% to 31
minutes in 2012 from 9 minutes.
4. Transition away from low-margin 2G to higher-margin
mobile advertising, video and gaming businesses
Investors who sold FENG after the 3Q 2013 earnings may not have
fully considered the factors leading to the weaker than expected
sales guidance and the long-term implications. FENG's in-line 3Q
sales and 4Q guidance miss was attributable to unexpected weakness
in the FENG's 2G business. Since it is FENG's lowest-margin
business, the decline had a muted impact on FENG's earnings.
The 2G business consists of SMS and MMS based services such as
community chat, messaging, picture download, personal ring tones,
etc. to users through various 2G and 2.5G channels. As China's
adoption of 3G and 4G LTE accelerates, SMS-based WVAS revenue will
continue to decline and will eventually disappear.
This is positive for FENG because low- to no-growth revenue with
5-10% operating margins will be replaced by FENG's higher-growth
businesses which are growing an order of magnitude faster and have
2-3x the margins. A key example of such a business is the Company's
relatively new Web games business:
FENG launched its web games business last year and will launch
its 3G/4G mobile games business in 2014. Both businesses will have
much higher margins than its 2G business.
FENG's margins have improved as higher margin advertising, Web
games and 3G value-added services revenue replaces the much
lower-margin 2G revenue.
(click to enlarge)
Another driver of margin improvement has been the decline in
bandwidth costs as a % of sales.
(click to enlarge)
China's Ministry of Industry and Information Technology (MIIT)
has a goal to reduce bandwidth costs by 30-35% over the next five
years. Note the following quote from the CFO of 21 Vianet (
), China's dominant independent Internet infrastructure company,
VNET's 3Q 2013 earnings call
China Telecom and China Unicom, actually, they are making a
commitment... to the ministry, MIIT... to reduce bandwidth
cost... by 30% over the next 5 years.
(For more about VNET, see our Seeking Alpha report
Our industry contacts and the management teams of several
domestically-listed Chinese ISPs have suggested that bandwidth
costs have already begun to come down, which will structurally
boost FENG's long-term gross margins.
FENG continues to strengthen its position as an iconic media
company with the industry's most robust content-driven moat as well
as the most diversified multi-channel revenues.
The two factors that matter most to our investment thesis
- FENG's ability to strengthen its substantial content-based
- Continued success in transitioning its mobile revenue base
from FENG's legacy 2G business (feature phone-driven) to its
high-growth 3G (smartphone-driven) business.
FENG's 3Q earnings showed progress on both fronts, although the
Company's strong progress on the latter was obfuscated by the
ongoing transition from legacy to higher-growth mobile business.
The long-term bullish implications of this transition are evident
in FENG's large increases in margins and profitability,
particularly versus expectations.
We continue to believe that FENG provides investors an
opportunity to buy a secular winner coming out of a cyclical trough
and gain exposure to some of the highest growth trends in global
media without paying the nosebleed multiples often associated with
such investment opportunities. Due to its compelling differentiated
content, FENG continues to take market share from competitors in
PC, mobile and online video. Its success in mobile and online video
are particularly notable, given their rising importance to both
advertisers and investors. The increase in market share further
allows FENG to attract more advertisers and continually raise
pricing. The virtuous cycle created by growing traffic, market
share and increased pricing will allow FENG to continue its
fundamental momentum in 2014.
I am long [[FENG]], [[VNET]]. I wrote this article myself, and it
expresses my own opinions. I am not receiving compensation for it
(other than from Seeking Alpha). I have no business relationship
with any company whose stock is mentioned in this article.
Refer to additional disclosures here:
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