Weibo Corporation
Q2 2019 Earnings Call Transcript

Published: 19 Aug 2019

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to Weibo reports second quarter financial results conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded.I would like to hand the conference over to first speaker today, Ms. Sandra Zhang. Thank you. Please go ahead.

[Sandra Zhang:]

Thank you operator. Welcome to Weibo's second quarter 2019 earnings conference call. Joining today are Chairman of the Board, Charles Chao, our CEO, Gaofei Wang, our SINA Group CFO, Bonnie Zhang and our VP Finance and Interim CFO, Fei Cao. The conference call is also being broadcast on the Internet and is available through Weibo's IR website.Before the management remarks, I would like to read you the Safe Harbor statement in connection with today's conference call. During today's call, we may make forward-looking statements, statements that are not historical facts, including statements of our beliefs and expectations. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Weibo assumes no obligation to update the forward-looking statements in this conference call and elsewhere.Further information regarding this and other risks is included in Weibo's Annual Report on 20-F and other filings with the SEC. All the information provided in this press release is occurring as of the date hereof. Weibo assumes no obligation to update such information, except as required under applicable law.Additionally, I would like to remind you that our discussion today include certain non-GAAP measures, which include stock-based compensation and certain other expenses. We use non-GAAP financial measures to gain a better understanding of Weibo's comparative operating performance and the future prospects. Our non-GAAP financial excludes certain expenses, gains or losses and other items that are not expected to result in future cash payments or are non-recurring in nature or not be indicative of our core operating results and outlook. Please refer to our press release for more information about our non-GAAP measures. Following management's prepared remarks, we will open the line for a brief Q&A session.With this, I would like to turn the call over to our CEO, Gaofei Wang.

[Gaofei Wang:]

[FOREIGN LANGUAGE]Thank you. Hello everyone and welcome to Weibo's second quarter 2019 earnings conference call. On today's call, I will share with you highlights in Weibo's user growth, product and monetization, as well as progress we made on key initiatives in 2019.Let me start with our second quarter financial results. We are delighted to see solid growth in revenues and user base. Our total revenues reached $431.8 million, up 1% year-over-year, or up 7% on a constant currency basis. Advertising and marketing revenues reached $370.7 million, flat year-over-year, or an increase of 6% on a constant currency basis, 86% of our ad revenues come from mobile. Non-GAAP net income during the second quarter was $156.4 million, representing a non-GAAP net margin of 36%.On the user front, in June 2019, Weibo's MAUs reached 486 million, up 13% year-over-year, representing a net addition of 55 million users year-over-year or 21 million quarter-over-quarter. Average DAUs reached 211 million, up 11% year-over-year with a sequential acceleration from prior quarter. In June, 94% of Weibo's MAU come from mobile.In the second quarter, on top of user growth, we have progressively focused on improving user retention and engagement as it is particularly important for us to strengthen our competitiveness amid a deceleration of the growth in overall China mobile Internet population, leveraging and optimizing platform mechanisms in facilitating social interaction and improving content distribution capabilities, we are encouraged to see enhanced efficiency in content distribution which helps to grow our user scale and more importantly led to a double digit growth in feed refreshment and impressions and user interactions on year-over-year basis.On monetization front, KA business continued to grow nicely during the quarter benefiting from the increasing adoption of social ads within client's ad budget. It is most attributable to sales team advance know-how in addressing customer demand and capturing market opportunity. SME business achieved double digit growth quarter-over-quarter as our initiative to refine ad product and optimize sales channel have taken effect, despite near term market challenges still exist.In discussing our operating update of the second quarter, I will cover the areas of users, content and customers of Weibo.Let's start with user growth and engagement. In the second quarter, Weibo's net addition of MAUs and DAUs on a quarterly basis were the highest level among the past four quarters and user engagement, feed refreshment and impressions all delivered robust growth exceeding our expectations. The enhanced user growth and engagement in the second quarterly were mainly attributable to key areas of progress we made.First, we expanded our channel coverage and enhanced user acquisition efficiency through optimized channel investment strategy. Second, the frequency of content consumption per user and interaction has been elevated by a large degree through improvement of content consumption efficiency and optimization of social related functions. Third, we executed well in the new user acquisition and cost of new users, leveraging our strength in popular culture around strength in transformations around the hot events and discussion.Let me provide more color those initiatives.First, from a China perspective, we have made good progress in our partnership with handset manufacturers and top apps benefiting from deepened collaboration with these partners in the content area. MAU from domestic handsets continue to grow double digit year-over-year. Meanwhile, the cooperation top app have allowed Weibo content accessible from increasing number of online platforms and make Weibo service available to a broader user community in a timely manner. This partnership helps enhance our efficiency in user acquisition midst intense market competition.Next, on product front. We initiated a series of product improvement around social interactions as well as speed and video consumption, improving user engagement and enhancing content consumption efficiency.Let me first elaborate on our work around enhancing Weibo's community products. First, on enhancing social features in the public domain of traffic, we rolled out a product called hardcore fans aiming to build bond between fans and content creators. In the first half of 2019, social interaction generated by users grew double digit year-over-year. Second, we revamped our community products such as super topic and fans group. This will manifest in driving interaction among users and consequently user retention and engagement. As such, over 80% of celebrity accounts and over 20% of Big Vs already have their own super topics. The number of user engagement and interaction within the super topics product grew double digit on a sequential basis. Our efforts to strengthen community product allow us to attract more self medias to accumulate and engage with fans through a community product on Weibo further driving user growth and user engagement on the platform.Next, on feed consumption. The enhancing synergies among various piece to deepen user's feed consumption is the leading factor for the robust growth of feed refreshment and impressions in the second quarter. For instance, we have integrated hot search and hot trend feeds embedded in the discovery zone in the second quarter which largely enhanced user consumption of content and time spent. In June, users who consumed video content in the interest feeds after accessing hot search increased 40% year-over-year. Meanwhile, through our efforts to improve video content recommendation, we saw traffic exposure to mid-tier and long-tier vertical content grew 50% quarter-over-quarter. All these endeavors contributed to a 50% year-over-year growth of refreshment of interest based feed in the second quarter.Finally, on video consumption. We continued to improve PTC video production and consumption experience. We have further optimized monetization through which we proactively invite content creators to generate quality video contents and single out quality video contribution by categorization and tagging. Additionally, we focused on enhancing the consumption experience of quality videos, introducing food and cosmetics vertical channels in the video community. In June, the number of daily posts of PTC videos grew double digit year-over-year. Second, we continue to enhance our video recommendation and distribution capabilities. To share some metrics, video views on our platform grew double digit on both annual and sequential basis in June.Moving on to content. In June, the number of top content creators, the number of posts and views generated all delivered double digit growth year-over-year. Meanwhile, compared to same period last year, social interaction initiated by top content creators grew robustly. The encouraging result was primarily attributable to the below two factors. First, as I mentioned above, sales of top content creator are more community centric on Weibo which includes top content creators to accumulate loyal fans and then to deepen communication with their fans using super topic and fans group product. As a result, engagement of top content creator on Weibo grew robustly allowing Weibo to attract more KOLs from other platforms to accumulate fans by means of fans community product. Second, we enhanced platform traffic distribution for the contents of top verticals in interest-based feeds including hot Weibo feed and hot search. This quarter, we focused on two verticals to optimize the process of encouraging quality content creation by top content creators and supporting traffic distribution for this content in the interest based feeds and hot search, promoting vertical top content creator's ability to capture the additional traffic. For example, compared to December last year, content exposure from fashion and cosmetic vertical in interest-based feeds and in hot search increased over 100% and 300% accordingly. In the next coming quarters, we will expand our practice in top verticals to other vertical areas, offering targeted traffic to promote content distribution and facilitate vertical content generation.Lastly on monetization. In the second quarter, our KA ad revenue continued to deliver solid growth, up 12% year-over-year or 19% on a constant currency basis. Despite ad budget cutbacks from several industry amid macro uncertainties, it continues to reinforce our strength in the KA sector. Our primary focus at this stage is to drive up ad spend from the relatively macro resilient industries. To achieve this, we consistently bring forth innovative ad format against our customers' needs, providing fresh marketing experience. For example, in the second quarter, our newly launched ad product featuring a combination of app opening and a top inventory in the feed to compound campaign effect resonates with the brand advertiser. In addition, leveraging our strength and advantage in hot topics, celebrity and KOL, IP content such as variety show and movies and other PTC video content, an increasing number of brand advertisers chose Weibo as their social marketing platform. For example, along with Samsung launching its new model for Series A, the brand advertiser work with us to initiate a VLOG, a record event on Weibo. The event invited more than 22 KOLs with fans over 10 million to participate in the event topic discussion and distribution and further attracted over 3,400 top content creators, largely stimulating user's enthusiasm and engagement. As a result, event topic views reached 3.7 billion and media views around the event reached 500 million. According to third-party data, brand's recognition for Samsung's Model A80, a factory product of the Samsung Series A increased 143%. And meanwhile, an increasing number of customers wished to uplift their brand image with the domestic consumption upgrade. As such, we optimized our local sales agency structure to enhance our ability to acquire more traditional local TV brand advertisers, supporting our strategy to fully extend local KA customers scale. For example, in [indiscernible] province, the number of local KA customer and their marketing spend increased nearly 100% and over 200% year-over-year respectively.On the SME business side, we still faced fierce competition in the performance ad market. That said, leverage of incremental ad inventory brought by traffic growth, we believe this is still ample room to grow our revenues. Thanks to the optimization in channel and product, SME ad revenue generated in the second quarter was flat year-over-year in renminbi term with effective CPM stabilized quarter-over-quarter. Let me share more color on our work ahead. First, we will focus on stabilizing ad spend from the top customers. We established a separate team to serve top SME customers with customized service and product in order to optimize their ad performance and better understand their ad spend pattern. Overall, ad spend from top SME customers stabilized sequentially in the second quarter. Second, our assessment of ad agency structure and management will encourage our sales agency to develop new customers and expand new industries while strengthening the market order. As a result, ad spend and retention rates of the newly acquired customer steadily improved contributing a higher proportion to the total SME ad revenues. Third, we made strides in increasing the overall ad performance through various optimization on the product and operations front, unifying the efforts of the product, operation and sales team. For example, the traffic direction efficiency of our vertical video ads increased significantly leading to significantly better ad performance and higher sell-through rate of the product. Lastly, we have also been promoting our KOL marketing among SME customers aiming to help customer attract user's attention and achieve higher ROIs through the incorporation of brand, KOL and events. For example, [indiscernible], a Japanese cross-border online shopping platform, together with its brand spokesman, Yamashita Tomohisa, initiated an e-commerce promotion event Sakura Festival on Weibo. During the day, more than a millions fans posted and distributed related content increasing brand awareness. [Indiscernible] app download ranked 16 in shopping app chart, significantly up from the 42 spot.To conclude, the performance advertising market in China is skewed given supply over demand dynamics. As such, while maintaining sufficient ad inventory to offer, Weibo still has mitigate the changes on the demand side. In such a scenario, we will have to go through a transitional period with structural changes of our customer composition as well as a comprehensive optimization on ad product to gradually earn reclamation from customers and thus meaningfully impact our topline growth. In the third quarter, we will further upgrade our super FST products such as empowering content based targeting, optimizing traffic direction and design, improving the traffic direction performance within interactive scenarios, just to name a few. We believe that endeavoring to advance super FST system can help us acquire more customers and additional ad budget in the future.With that, let me turn the call over to Fei Cao for a financial update.

[Fei Cao:]

Thank you Gaofei and hello everyone. Welcome to Weibo's second quarter 2019 earnings call. Let's start with our user metrics.Weibo's MAUs reached 486 million in June 2019 representing a net addition of 55 million users on a year-over-year basis. Weibo's average DAUs reached 211 million, a net addition of 21 million users on a year-over-year basis. Mobile MAUs represented approximately 94% of total MAU.Turning to financials. As a reminder, my prepared remarks would focus on non-GAAP result and old comparisons on a year-over-year basis, unless otherwise noted. Weibo's second quarter 2017 net revenue was $431.8 million, up 1% or 7% on a constant currency basis. Operating income reached $166.2 million, representing operating margin of 38% compared to 39% last year. Net income attributable to Weibo was $156.4 million, representing a net margin of 36% compared to 37% last year. Diluted EPS was $0.68, flat year-over-year.Let me give you more color on revenue. Advertising and marketing revenues for the second quarter 2019 reached $370.7 million, flat or an increase of 6% on constant currency basis. Mobile ad revenue was $319.2 million, up 5% contributing approximately 86% of total ad revenues, up from 82% last year.Moving on to KA. In the second quarter, KA ad revenues reached $171.6 million, up 12% or 19% on a constant currency basis. From the industry perspective, FMCG continued to exhibit strong resilience and addressed the KA revenue book as Weibo's social marketing solution resonated well with lead brand advertisers to initiate content, enhance brand awareness, leverage influencers and social assets accumulated to target relevant audience for brand loyalty and sales conversion. We are also pleased with the solid performance of entertainment sector despite industry headwinds, largely owing to Weibo's leading position as an essential social media platform to distribute and promote entertainment content.Turning to SMEs. In the second quarter, Weibo's SME ad revenues reached $174.9 million, down 6% or flat on a constant currency basis. Our effort to enhance ad performance, optimizing sales channels and differentiating our social ad products have taken some initial effect in the second quarter to retain existing customers, tapping to undermonetized verticals and attract new customers to the platform. Nevertheless, since the unfavorable advertiser demand on the inventory supply dynamics still persist, we will continue to face near term challenges from certain large ticket item categories and online gaming sector with a tough comp from last year.Ad revenues from Alibaba was $24.1 million, down 23% or 18% on constant currency basis, which is slightly better than our expectations, as we had a particularly difficult comp in 2018 Q2 with ad revenues from Alibaba growing triple digit year-over-year during the same period last year. The ad product, video and search ad products continued to show strength and outperform other ad products driving on strong momentum of user traffic to search and video. We are also delighted to see the increasing adoption of social marketing solutions such as KOL marketing for advertisers as a integral part of their ad content. Value added service, VAS revenue was $61.2 million in the second quarter, up 8% or 15% on constant currency basis. The increase was mainly attributable to the revenue derived from live streaming business and was partially offset by decrease in gaming revenue.Turning to costs and expenses. Total cost and expenses for the second quarter was $265.6 million, up 2%. The increase in cost and expenses was mainly resulted from incremental cost of revenue share of live streaming business and increase in personnel related costs and was largely offset by a 24% year-over-year decrease of sales and marketing expenses, resulting from a more disciplined channel investment strategy and better execution of marketing content. Operating income in the second quarter was $166.2 million representing operating margin of 38% compared to 39% last year.Turning to income tax. Under GAAP measure, income tax expense for the second quarter was $26.1 million compared to $25.1 million last year. Net income attributable to Weibo in the second quarter was $156.4 million representing a net margin of 36% compared to 37% last year.Turning to our balance sheet and cash flow items. As of June 30, 2019, Weibo's cash, cash equivalents and short term investments totaled $1.56 billion. In the second quarter, cash provided by operating activities was $132.8 million. Capital expenditures totaled $3.2 million and depreciation and amortization expenses amounted to $6.7 million.Now let me turn to business outlook. In light of currency translation risk, our business outlook would focus on financial estimates on a constant currency basis. We anticipate our third quarter 2019 net revenues to increase from 6% to 9% year-over-year on a constant currency basis. This forecast reflects Weibo's current and the preliminary view and is subject to change.Before turning to the Q&A session, I would like to add a brief note on $800 million senior note offering our company completed in early July. The note bears an interest rate of 3.5% and are due in 2024. We have received a total of approximately $793 million net proceeds after deducting underwriting discounts and commissions and estimated operating expenses payable by us. We plan to use the proceeds from the offering for general corporate purpose to support long term development of the company.With that, let me now turn the floor over to the operator for the Q&A session.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Gregory Zhao from Barclays. Please ask your question.

[Gregory Zhao:]

Hi management. Thanks for taking my questions. So actually I have two questions. The first one, we see very impressive user growth momentum in this quarter. So just wanted to check how shall we think about the sustainability of the growth trend in Q3 and in Q4 and what is your strategy to maintain the growth momentum? And second one is on the content. So when we are coming close to the National Day anniversary, so just want to have update from the perspective of regulation around social content. Thank you.

[Gaofei Wang:]

[FOREIGN LANGUAGE]First, we see very strong user growth in this quarter. We are adding over 50 million, 20 million MAU and DAU respectively. I think the net additional users accelerated notably versus prior quarters.What we see is the engagement rate, for example, the frequency of our refreshments, our video viewership and also in terms of the user participating in their interaction on the platform has grown even faster than the pure number of user growth. And we also noted this trend continued in the last two months going to the third quarter.I think that the growth really comes from the two aspects as I indicated in the prepared remarks.I think the user base has already been very large and had a very strong network effect. So we see like the leveraging for the certain hot topics or trends, we were able to track organic traffic from those events. And also we were able to -- that itself has improved our user acquisition efficiency.I think the second point is it comes from our ability to enhance the platform's social attributes. As I indicated that the interaction between the fans and the Big Vs has beefed up quite significantly. And on top of that, we see our platform has the ability to attract other Big Vs from other platform, so that we believe that trend can continue. And also with our new fan features such as hardcore fans and our products in fans community further strengthen the interaction relationship between our fans and the content generators.In summary, I think we are benefiting from the ability to operate in the hot trends or hot events that gives us the efficiency, help us to improve the efficiency in user acquisition both for new users and our ability to recall our users. And on top of that, our community product was able to attract Big Vs from other platforms, even including those from live streaming platforms, so that to create a bigger platform for the Big Vs and the fans to interact.As we indicated in the past, for regulatory event that Weibo's platform feature is not limited to one particular area. But for this year, in particular, in welcoming the National day for 70-years anniversary, entertainment industry is inevitably was most negatively impacted.Well, our contents are not limited to the self media. We have the vast majority official accounts available on our platform. So in an event like this, we are actually benefiting from the more constrained regulatory environment as our content will continue to be supplied from those accounts with validity and with the more formal voice.

[Gregory Zhao:]

Okay. Thank you. Very helpful.

[Operator:]

Your next question comes from the line of Alicia Yap from Citigroup. Please ask your question.

[Alicia Yap:]

Hi. Good evening management. Thanks for taking my questions. My question is related to the advertising budget and also Weibo competitive positioning. So could management share with us or elaborate a little bit like, what are the main reasons why the ad budget from the KA account is more resilient as shown in the recent quarter? Do you think that they are more resilient towards just the Weibo platform while they are cutting back the budget on other platforms? If so, what are the reasons that hold up Weibo? And then can this be sustainable? Will Weibo see any threat in the future? Thank you.

[Gaofei Wang:]

So when we look at KA accounts growth rate for second quarter, we have to consider the tough comp due to World Cup related promotion in last year. And that factor will also impact the growth rate of our Q3 as well. As I indicated, part of the regulatory reasons, some of the IP video shows has been postponed on the video platform. These had a negative impact on certain cosmetic customers, their spending on our platform as well because their budgets largely have to be matched to the release schedule of the blockbuster IP program.If we break this further into the industry segment, our growth are largely depending on those few industry segments such as FMCG, Auto has delivered a reasonable growth in the second quarter, so does e-commerce. However, a few other industry which are less resilient such as [indiscernible] or cellphone manufacturers, these are the ones we see a quite considerable slowdown in terms of their spending for marketing dollar.So with still the uncertainty resides in the macro in those KA accounts, our focus has been shifted much more to our product's competitiveness in the marketplace.I think there are three areas we are focusing for our KA revenue growth starting from a product perspective. Start at number one, it's an integral market effect with the performance and the branding. That's particularly true with FMCG and the e-commerce industry segments. That's the area we are expanding beyond our traditional brand advertising over pricing and we believe there's good growth potential to taking on their performance related ad budget.With our strong inventory available, with our celebrity and our KOL, we are leveraging that advantage with the brand marketing as we see brand marketing moving very quickly on the social needs so that we want to make sure we are definitely taking advantage of this movement.As I indicated in the prepared remarks like Samsung and even some other cases we have done for our automobile industry where we leverage our celebrity resources on the platform to take additional budgets out of these customers.The other element, as I indicated, we are moving more aggressively to taking ad budgets from regional brands. Historically, these brand's marketing focus were on the local TV station. Now we believe that's one of the other areas we see growth potential.I think in summary, these three areas are the focus point for us to grow our KA accounts and continue to enhance our competitive edge in the KA accounts marketing.

[Alicia Yap:]

Thank you.

[Operator:]

Your next question comes from the line of Bill Liu from Goldman Sachs. Please ask your question.

[Bill Liu:]

Thank you management for taking my question. My question is on the SME advertising. So could you give us some updates on the strategies to grow this segment because we are seeing the intensive competition environment given some of the private players have raised a very high target for the year and especially on the improving conversion rate front? Also, any new initiative or strategic focus for rest of this year? Thank you.

[Gaofei Wang:]

Even though we have experienced better than expected SME revenue delivered in second quarter, we believe we still see a lot of potential for us, can do better.Put aside the ROI and ECPM. As I indicated, ECPM rates have been relatively stable on a quarter-over-quarter basis. I think the main issue resides on the demand side as we continue to see the weakness on that particular area and that I think for us the issue to resolve is to really try to raise our sell-through rate in the coming quarters.I think right now, we see a mismatch in terms of the commercial sell-through with our growth of our user traffic. At this moment, these two haven't been matched very well, that's the key focus for us to do for the third quarter. And also in the OCPM area, we need to further grow our targeting ability as well as algorithm.I think in terms of the industry segment, particularly for education and gaming, we were less flexible in terms of user acquisition strategy. That was reflected partially in our distributor policy types of thing. So we are definitely making some shift in that area in the coming quarters.On top of that, I think we are continuing to focusing on the new customer acquisition. Even though in the second quarter, our new customer spending as a percentage of revenue has grown meaningfully, we think we can do further even better in the quarters to come.I think as in summary, what we are facing today in terms of SME customer sentiment, the key problem is the sell-through rate. So that will be the focal point in the second half of 2019. In terms of the top customer within the SME customer segment, we need to provide more flexibility in terms of pricing and enhance our service team. So also on the new customer acquisition area, I think we have to be much more aggressive compared to the past.

[Bill Liu:]

Thank you.

[Sandra Zhang:]

This concludes our conference call today. Thank you for joining us. We will see you next quarter.

[Operator:]

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