Phoenix New Media Limited — FY2015 Form 20-F
Reporting period: Fiscal year ended December 31, 2015. This filing is an annual report; it does not provide a clear standalone fourth-quarter 2015 income statement or cash-flow value. Financial statements are audited and prepared under U.S. GAAP. Amounts below are RMB millions unless otherwise indicated.
Business context
Phoenix New Media operates Chinese-language Internet, mobile and video media businesses. It earns revenue from advertising and paid services and conducts substantially all China operations through contractual arrangements with variable interest entities (VIEs). Advertising generated 76.2% of 2015 revenue; paid services generated 23.8%. Mobile advertising grew rapidly, while paid services—particularly mobile value-added services (MVAS)—continued to decline.
Key financial metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Total revenue | 1,609.2 (US$248.4m) | 1,637.9 | Down 1.8% |
| Net advertising revenue | 1,226.5 | 1,190.2 | Up 3.1% |
| Paid-service revenue | 382.7 | 447.7 | Down 14.5% |
| Gross profit / margin | 779.8 / 48.5% | 856.2 / 52.3% | Margin down 3.8 percentage points |
| Operating income / margin | 79.0 / 4.9% | 237.6 / 14.5% | Down 66.8% |
| Net income attributable to Phoenix New Media | 73.6 (US$11.4m) | 263.1 | Down 72.0% |
| Adjusted net income attributable to Phoenix New Media (non-GAAP) | 145.2 (US$22.4m) | 305.2 | Down 52.4% |
| Operating cash flow | 220.8 | 273.5 | Down 19.2% |
Basic and diluted earnings were RMB0.13 per ordinary share, or RMB1.03 per ADS. The non-GAAP adjusted figure excludes share-based compensation and investment-related items; it should not be viewed as a substitute for GAAP earnings.
At year-end, cash and cash equivalents were RMB310.7m; term deposits and short-term investments were RMB769.7m; restricted cash was RMB125.0m. Current assets totaled RMB1,930.9m against current liabilities of RMB742.8m. Total liabilities were RMB762.5m and shareholders’ equity was RMB1,804.7m. Short-term loans were RMB131.0m; the filing reports no long-term borrowings. The RMB125.0m restricted deposit secured the bank facility.
Investing activities used RMB1,256.9m, including investment in Particle and net placement of deposits and short-term investments. Financing activities provided RMB64.4m, including RMB123.6m of short-term loan proceeds and RMB66.4m used for share repurchases. Cash and cash equivalents fell RMB975.2m during the year.
Material changes versus prior year
- Advertising revenue rose modestly, but paid-service revenue fell 14.5%; advertising’s share of total revenue increased from 72.7% to 76.2%.
- Mobile advertising revenue rose 114.2% to RMB347.1m, while management cited weaker PC advertising demand and a decline in average revenue per advertiser, from RMB1.9m to RMB1.7m. Advertisers increased 15.2% to 705.
- Gross margin contracted as cost of revenue rose 6.1%, including higher revenue-sharing and content/operational costs.
- Operating expenses increased 13.3% to RMB700.8m. General and administrative expense rose 33.5%, mainly from higher bad-debt provisions; sales and marketing costs also reflected increased mobile traffic acquisition.
- Other income fell 74.0% to RMB18.9m, reflecting lower interest income and the absence of the prior-year disposition gain, alongside higher equity-investment losses.
- Net receivables were RMB506.4m, while the allowance for doubtful accounts increased to RMB58.8m from RMB23.8m. The 2015 bad-debt provision was RMB47.0m.
Outlook, commentary, risks and unusual items
- Management expects mobile to be a primary channel for future news consumption and expects advertising revenue to become a larger share of revenue. It reported mobile advertising growth but gave no specific numeric revenue or earnings guidance.
- Management expects 2016 capital expenditures to decrease by approximately RMB6.8m from 2015’s RMB43.5m, funded from operating cash flow and cash balances. It stated that available cash, investments and operating cash flow should cover anticipated needs for the next twelve months.
- The company held approximately 46.95% of Particle on an as-if-converted basis, with a year-end carrying value of US$79.3m. It subsequently advanced Particle US$20m in unsecured, 12-month loans at 4.35% interest. Particle’s performance and recoverability are material investment risks.
- Several investments were impaired or written down, including RMB3.2m for the suspended online-lottery investee, RMB6.4m for Lifeix, and a fully impaired RMB15.2m loan receivable from Phoenix FM. Mobile-game operating rights were also impaired by RMB3.8m.
- The company depends on China Mobile and Phoenix TV. China Mobile-related advertising and paid services represented 19.2% of 2015 revenue; paid-service revenue also relies heavily on mobile operators. The Phoenix TV content, trademark and cooperation agreements were extended only through May 27, 2016 while replacement terms were being negotiated.
- Key regulatory exposures include the VIE structure and the absence of Internet news and audio-visual program transmission licenses. The filing describes potential sanctions that could restrict or halt affected services. It also identifies noncompliance risk relating to ownership of trademarks used in value-added telecommunications services.
- The Draft Foreign Investment Law was still under consideration and could affect VIE structures. Other risks include China regulatory and content controls, advertiser and agency concentration, rising content and traffic-acquisition costs, RMB movements, and reliance on China Mobile’s billing and distribution systems.
- The filing reports no material pending legal proceedings, but notes 44 PRC cases from January 2015 through March 2016, 34 concluded, and RMB0.5m in aggregate damages and settlements paid. An unrecognized tax benefit of RMB18.4m was recorded as a long-term liability; management said timing of payment could not be reasonably estimated.
- No dividends were declared, and the company said it had no present plan to pay dividends in the near future. Management and the auditor concluded internal control over financial reporting was effective as of December 31, 2015.
Most important facts for investors to verify
- Whether the Phoenix TV agreements were renewed on acceptable terms after May 27, 2016, including continued exclusive content rights.
- Current status and consequences of the missing Internet news and audio-visual licenses, trademark compliance, and the proposed foreign-investment rules affecting the VIE structure.
- Collection and aging of receivables, the adequacy of the bad-debt allowance, and whether receivables from China Mobile and investees are being collected.
- Particle’s operating progress, valuation assumptions, funding needs, and repayment capacity for the US$20m loan.
- Whether mobile advertising growth can offset continued paid-service declines and higher traffic-acquisition, content and operating costs.
- Liquidity available after restricted cash, short-term debt, investment commitments and any limits on transferring funds from China; also verify the reported cash-flow decline and deposit maturities.
- Potential tax exposure from preferential-tax treatment and the RMB18.4m uncertain-tax-position liability.