Weibo Corporation
Q3 2020 Earnings Call Transcript

Published: 28 Dec 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Weibo Reports Third Quarter 2020 Financial Results Conference Call. At this time, all participants are in listen-only mode. After speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to your first speaker for today, Ms. Sandra Zhang. Thank you. Please go ahead, ma'am.

[Sandra Zhang:]

Thank you, operator. Welcome to Weibo's third quarter 2020 earnings conference call. Joining me today are our Chief Executive Officer, Gaofei Wang; and our VP, Finance and Interim CFO, Fei Cao. The conference call is also being broadcasted on Internet and is available through Weibo's IR website.

[Gaofei Wang:]

Thank you. Hello, everyone, and welcome to Weibo's third quarter 2020 earnings conference call. On today’s call, I will share with you highlights on Weibo's user, product, and monetization, as well as progress we made on our key initiatives in 2020. Let me start with our third quarter financial results. In the third quarter, our total revenue reached $465.7 million, flattish year-over-year. Advertising and marketing revenues reached $416.7 million, an increase of 1% year-over-year. 90% of our add revenues came from mobile. On the user front, Weibo's MAUs grew 3% year-over-year to 511 million in September 2020 and average DAUs grew 4% year-over-year to 224 million in September 2020, both representing a decrease of 2% quarter-over-over. 94% of Weibo's MAU came from mobile.

[Fei Cao:]

Thank you, Gaofei. And hello, everyone. Welcome to Weibo’s third quarter 2020 earnings conference call. Let's start with user metrics. In September 2020, Weibo’s MAU reached 511 million, representing a net addition of approximately 14 million users on a year-over-year basis. Weibo’s average DAUs reached 224 million, representing a net addition of approximately 8 million users on a year-over-year basis. Let's turn to financials. As a reminder, my prepared remarks would focus on non-GAAP results and all the comparisons are on a year-over-year basis unless otherwise noted. Now, let me walk you through our financial highlights for the third quarter of 2020. Weibo’s third quarter 2020 net revenues were $465.7 million, flat or a decrease of 4% on a constant currency basis. Exceeding the high-end of our guidance, operating income were $179.4 million, representing an operating margin of 39%. Net income attributable to Weibo was $152.9 million and the diluted EPS was $0.56. Now, let me give you more color on revenues. Weibo’s advertising and marketing revenues for the third quarter 2020 increased 1% to $416.7. Mobile ad revenues were $376.1 million, contributing approximately 90% of total ad revenue up from 87% last year. Moving on to KA. In the third quarter, Weibo’s KA revenue reached $221.2 million, an increase of 12% year-over-year and 33% quarter-over-quarter. Leveraging a nice rebound in domestic consumption and ongoing digital transformation, our KA business demonstrated great recovery momentum with the number of brand advertisers branding with us this quarter hitting record high. We’re delighted to see a growing number of brands recognizing Weibo’s unique value proposition in connecting to younger generation, KOLs influence, as well as delivering on brand plus performance goals. This quarter, on top of traditional branding budget, KA customers notably allocated higher budget to performance driven products such as feed and the KOL marketing offerings to drive users all the way down the funnel, which presents us this opportunity to capture incremental ad wallet in the long run. Industry wide, the strength in our KA business was relatively broad based with quarter with growth fueled by key sectors such as FMCG, automobile and luxury category, et cetera. I'm pleased that entertainment, travel and real estate sectors remained on the negative growth trajectory. But we are seeing early signs of recovery following the ease up of restrictions on theatres and tourism. Turning to SMEs. I the third quarter, Weibo’s SME ad revenue reached $166.4, a decrease of 15% and an increase of 20% quarter-over-quarter. The descending trend of our SME business was mainly attributable to two factors. First, the current pace of offline merchants continued to lag behind the overall SME sector and the way down the growth of the SME ad revenue. And second, as we mentioned in the last quarter, our initiative to clean up low quality customers and also negatively impacted our SME revenues. gaming and education sectors continued to book digit growth year-over-year, bolstered by further improvement around building efficiency and performance. In September, we officially launched our revamped ad leading system featuring a series of updates on optimized CPX, video and the KOL ad offerings in the hope of driving ROI for customers through a more direct response features, better ad relevancy, and the higher ad placement efficiency. Ad revenues from Alibaba for the third quarter increased to 52% to $29.2 million. The momentum of ad spend from Alibaba reflects our strengthened cooperation in driving value for brands and merchants to achieve branding plus performance purpose through integrated ad content on both platforms. That said, ad spend from Alibaba highly correlated to its own business operation, especially its marketing strategies, which may change from time to time. As such, we cannot assure that such robust growth will be sustainable in the future. Value added service, VAS revenues decreased 11% to $49.1 million in the third quarter, primarily due to decrease of live streaming revenue, partially offset by an increase in membership revenue. Turning to costs and expenses. Total costs and expenses for the third quarter increased to $286.4 million. The increase was primarily due to the higher bad debt provision and the personnel related costs, partially offset by a decrease in marketing spend. Operating income in the third quarter was $179.4 million, representing an operating margin of 39%, compared to 41% last year and 31% in the second quarter. Turning to income tax and the GAAP measure. Income tax expense for the third quarter was $30 million, compared to $31.4 million last year. Net income attributable to Weibo in the was $152.9 million, representing a net margin of compared to 38% last year and 30% in the second quarter. Turning to our balance sheet and the cash flow item. As of September 30, 2020, Weibo’s cash, cash equivalents, and short-term investments totaled $3.2 billion compared to $2.4 billion as of December 31, 2019, mainly due to net proceeds of $714.3 million received from a Weibo senior note offering in July 2020. In the third quarter of 2020, cash provided by operating activities was $235.2 million; capital expenditures totaled ; and depreciation and amortization expenses amounted to $7.7 million. Now, let me turn to financial outlook. We anticipate our fourth quarter 2020 net revenues to increase by 1% to 3% year-over-year on a constant currency basis. This forecast includes revenue estimate of our interactive entertainment company, which was acquired and consolidated to our company in November 2020 and represents approximately 2% of our revenue estimate in this quarter. This forecast reflects Weibo’s current and preliminary view and is subject to change. With that, let me now turn the call over to the operator for the Q&A session.

[Operator:]

Certainly. Ladies and gentlemen, we will now begin the question-and-answer session. We have the first question from the line of Alicia Yap from Citigroup. Please go ahead.

[Alicia Yap:]

Thank you. Good evening, management, and thanks for taking my questions. I have two questions related to advertising. Number one is related to the overall act of budget sentiments and recovery trend in China. It seems, China is on track for a decent recovery, but given the seriousness of the pandemic outbreak in other countries, do you – have you seen or do you think it will affect the ad budget onto the worries of the outbreak in other countries in terms of ad sentiments? And then second is related to the competition. It seems that management continue to mention the intensified competition from the short video companies in terms of the ad budget allocation. So not too sure will this intense competition continue into next year? Or do you think given Weibo’s product is recovering, I mean is improving, should we see the competitive landscape be actually moderate and improving over time? Thank you.

[Gaofei Wang:]

Okay. So, let me give you the answer for the very first question. So let's talk about the data of Q3. Let’s divide it into the brand and also SME. First of all, talking about brand ads, you can see that because Weibo is a very large company, so I don't think that pandemic is impacting the ad revenue or budget of the brand so far. But talking about the SME, I think that in the first-half of 2020, we really had a big impact, because previously our SME budget previously focused on offline, primarily speaking, and especially those kind of industries like O2O and also finance. So, I think that we made some changes on the SME side. So this year, we moved further to the online business and especially the online education, e-commerce and gaming, et cetera. So, second of all, I would like to say that in terms of our strategy focusing on the brand customers, currently speaking, our brand revenue or our ad revenue from the brand customers is relatively small compared with the other big companies, so – because previously and also, as of now, we pretty much focus on the top companies and also top brands. So you can see that, of course, we have a very steady growth of our number of customers, especially the brand customers. And also in 2021, we have some kind of changes and also adjustments over our strategy. For example, now, we are going to enlarge and expand the name list of those brand customers, especially focusing on the inclusion of regional brand and also those national fashionable brand as well. So you can see that in the next one, two years, we are going to see that more revenues or we're going to see more revenues coming from those middle and brand customers. And also next, I would like to say that talking about the SME part, so because I think that SME is really a kind of a sector in our business that is heavily impacted by the pandemic because previously, we pretty much focused on the O2O business and also there's a wedding dress and photographing and also e-commerce or financial industry. So, you can see that the O2O, because of the pandemic impact, this was heavily like dropped and declined. And also, second of all, we willingly dropped out some of the customers, for example, in the financial industry or cosmetic surgery industries. So, the SME side, we have a strategy that we are going to leverage the ability of the existing team to focus more online, especially online education and also gaming as well. So that is the reason why we are seeing a very good result of growth. And also next year, our focus will be using the same SME team to further optimize the online business and also to prioritize our services provided to those online brands and customers, and especially focusing on the network service, apps downloading service, for example. And also because that this year, we have big growth on the gaming industry, so that's why we are now pretty much more focused on the provisional services to those app downloading and other relevant areas. So, second, talking about the impact on the competition landscape of the short video. So you can see that we have, first of all, the indirect impact from this particular competition for the brand customers in specific or brands ads, if you like. So, if you're talking about this competition, we are talking about the indirect competition, first of all, from the long video side. But you can see that this year, because of this pandemic and also the lower down investment going to the entertainment sector, we can see that those brands are now preferring to invest their money into making videos on Weibo, BDBD or Red instead of those traditional platforms of making long videos, so I think that is a favorable trend toward this. And also, I want to say that in the SME sector, we still feel a little bit stressful, confronting the competition from the short video platform, because comparing with the text and also image like Weibo, we do see the advantages maintaining in the short video platform. But also what we have to do is that we want to focus on the service provision as well as the optimization of our algorithm for the ad as well. So, you can see that this year, we're doing very good job on gaming, especially Q3. So, you can see that it is helpful for us to get more budget from those brands and also customers. Also, next year, we're going to focus on getting more budget from the other famous customers in those cosmetic surgery area or e-commerce or Internet service, et cetera, so that it is very much helpful for us to get more budget from those short video platforms as well. But overall speaking, in the short run, I still believe that short video platform is very much advantageous in terms of making ads over the text and image-oriented platform like Weibo. So, and also, I have to say that and talking about the specific competition with the short video platform on the SME side, first of all, we are going to further invest into making more high-quality short videos on our side, so you can see that we have been always focusing on investment on this area. So this year, we are also building up more inventories of the advertisements as well at the same time based on short videos. And second of all, not only we are trying to focus on the content, but also we would like to focus more on the customer's conversion rate by putting ads and budget over our platform. So you can see on the education side, we're pretty much focusing on not only doing ad, but also making the conversion rate increase to them. So this is actually a kind of a hybrid way for us to contact or for us to overcome the challenges from the short video platforms.

[Alicia Yap:]

Thank you.

[Operator:]

Thank you. Next question comes from the line of Tian Hou from TH Capital. Please ask your question.

[Tian Hou:]

So the question is continued on the short video, the company has made great progress on the short video. But last quarter, we mentioned the company has about a half million offers already opened their short video accounts. So, I wonder how many of them opened accounts by the end of the Q3. And in 2021, what is the company's goal in terms of how many accounts do we plan, you know – or work on to open? And for the advertising revenues generated by short video, what's the percentage of total does the company expects that to be? That's my question, thank you.

[Gaofei Wang:]

So first of all, in our previous presentation, I mentioned a little bit about it. So let's just recap from it. So first of all, overall speaking, we have over 700,000 accounts already opened on the video accounts and also talking about those accounts having over 1 million followers, we have 13,000 of them already. So the growth rate is very good and glad. So of course, that – and having said that, that is still relatively way smaller comparing with the number of that we have or self-media that we have on Weibo. So, given the fact that creating the content of video is way more difficult than that of creating a text or image like we traditionally did in Weibo, so in the future I think the number of video accounts will be still remained relatively small against the total number of accounts that we have. And second of all, let's talk about our strategy, which is very clear already in our group. So, first of all, in terms of production, first, of course, we are going to emphasize more on encouraging those capable authors to create more high quality videos on our side. So, by those capable authors, I mean the media or KOLs or those food or delicious food accounts, and also those fashionable brands or fashionable accounts or those cosmetic KOLs as well. So, not only they can get the traffic from the video itself, but also they can gain an extensive traffic or feed from the Weibo itself from those text and image users. And second of all, the strategy is that we are going to attract more external accounts or external creators to join Weibo to publish their short videos at the same time. For example, we want to attract those people from or TikTok et cetera. So at the same time, not only they can generate videos on Weibo video account, but also they can actually at the same time, publish some text and image to show their attitude and sometimes interact with their followers by commenting et cetera. So you can see that this particular part of the hybrid model is the one that we enjoy the most growth or the biggest growth this year. So and also talking about the consumption side, the first thing is that for those creators of videos, not only they’re publishing their videos, but also at the same time, text and images as well. So if we're talking about the followers of those KOLs, you can see that the average time spending is like two times higher than that of the time spent on text and image only. So this kind of average time spending can help us to improve our activities. And also, second thing is that we can see that in Weibo, we can create such kind of independent space for the advertisement and also for the video-based consumption behavior as well. So this is really helpful for us to gain more budget and gain more revenue from the ad part, and also, we can build up a very good inventory of high-quality video and also advertisement as well. And finally, let's talk about the objective that we have. Of course, in the short run, we're going to focus on the investment driven strategy, which is to say that we are not saying – we're not saying that all the creators of the videos should actually, you know, give us more consumption payback higher than our investment, not necessarily speaking. So that is to say it's pretty much the case that in the short run, we're going to invest more than the revenue coming from those creators. So we have actually, of course, two aims. The first is that we are going to encourage more text and image creators to convert to the high-quality video creators. And second of all, we are going to attract more external creators from other platforms to arrive on Weibo account, video accounts, to create more videos and at same time, interactive content-based on images and text. So that is a very good strategy for us to further differentiate Weibo from other platforms, and also give us a sustainable revenue contribution from the ad path and video side as well.

[Tian Hou:]

Thank you. Thank you. Okay.

[Operator:]

Thank you. Your last question comes from the line of Miranda Hui from Bank of America. Please ask your question.

[Miranda Hui:]

Thank you, operator, and good evening, management. Thanks for taking my questions. Can you please share with us your preliminary outlook for the advertising business next year in particular the ad spend settlement of your advertisers in various industries? Thank you.

[Gaofei Wang:]

So, overall speaking, talking about the industry outlook, so continuously, we're not going to only focus on KA but also SME at the same time. And also, we are now trying to focus more on each different verticals. And also second, combine the brand together with effectiveness and conversion of that particular ad, so this is a very comprehensive and holistic strategy for this business. So, you can see that in the future, we can see that by doing that, we are going to increase the branding and also increase the SME side as well or effectiveness as well. So you can see that we are going to focus more on the verticals like automotives, gaming, and also FMCG as well. So, for example, gaming this year, we pretty much focus on those new games published this year and also they can – they have a huge demand of getting a very good effectiveness of more gamers and also high-quality content of games as well. Also let's talk about the industry of gaming for example, so because that now, we are trying to focus on the quality or the quality-oriented customers, so that is to say on the gaming side, now you can see that we are primarily very much – very well collaborated with Ali Game, Tencent or for example, and they are making high-quality games at the same time, so they're pretty much gaining more traffic from Weibo. But if you're continuously making some of the games like the webpage game et cetera, which does not necessarily need to build up the brand, but only focusing on the factors in this kind of advertisement, I don't think that they are going to get a further traffic from Weibo. So that is to say that we are going to see a very good growth on those concentrated verticals, especially those top brands concentrated areas, but not that distributed or like scattered area. So overall speaking, while we finished our monetization strategy implementation, we're going to see that in the future, we are going to continuously focusing on those customers that are investing more into the – their high-quality area. So, especially in the future, if the brand – not only the brand customers, but also SME, if they have more budgets focusing on the online advertisement, we are going to, you know, collaborate and also track those ads. Okay.

[Miranda Hui:]

Thank you, Gaofei.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.