Weibo Corporation
Q4 2019 Earnings Call Transcript

Published: 26 Feb 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Weibo reports fourth quarter and fiscal year 2019 financial results.[Operator Instructions]. I would now like to hand the conference over to your first speaker today, Ms. Sandra Zhang. Please go ahead, ma'am.

[Sandra Zhang:]

Thank you, Operator. Welcome to Weibo's Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. Joining me today are Chairman of the Board, Charles Chao; our CEO, Gaofei Wang; and our Senior Group CFO, Bonnie Zhang; and our VP Finance and Interim CFO, Fei Cao. This conference call is also being broadcast on Internet and is available through Weibo's IR website.Before the mentioned remarks, I would like to read you the safe harbor statement in connection with today's conference call. During today's call, we will 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. We will assume no obligation to update the forward-looking statements in this call and elsewhere. Further information regarding this and other risks is included in Weibo's Annual Report on Form 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'd like to remind you that our discussion today include certain non-GAAP measures, which exclude 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 financials exclude certain expenses, gains or losses and other items that are not expected to result in future cash payments or are nonrecurring in nature or will 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'll open the lines for a brief Q&A session. With this, I would like to turn the call over to our CEO, Gaofei Wang.

[Gaofei Wang:]

Thank you. Hello, everyone. Welcome to Weibo's Fourth Quarter 2019 Earnings Conference call. On today's call, I will share with you highlights in Weibo's user product and monetization, review the progress we've made in 2019 and lay out the strategy for 2020. Let me start with our fourth quarter financial results. In the fourth quarter, our total revenue reached $468.1 million, a decrease of 3% year-over-year or 2% on a constant currency basis. Advertising and marketing revenue reached $405.9 million, a decrease of 3% year-over-year or 1% on a constant currency basis. 88% of our ad revenue came from mobile. Non-GAAP net income for the fourth quarter was $176.5 million, representing a net non-GAAP net margin of 38%.For full year 2019, Weibo's total revenue reached $1.77 billion, up 3% year-over-year with 7% on constant currency basis. Advertising and marketing revenue were $1.53 billion, up 2% year-over-year with 6% on a constant currency basis. Non-GAAP net income reached $637.5 million, representing a non-GAAP net margin of 36%. On the user front, Weibo's MAU reached 560 million in December 2019, up 12% year-over-year, representing a net addition of approximately 54 million users year-over-year. Average daily users reached 232 million, up 11% year-over-year, representing a net addition of approximately 22 million users. 94% of Weibo's MAU revenue came from mobile.As we review the mobile Internet market in 2019, we were confronted with market challenges at the very beginning with escalating user competition in the media, social and video sectors and made an increasing mature Internet market in China. In response to this, we took specific steps to drive both use of scale and engagement growth to achieve platform expansion instead of solely focusing on use of scale. Well executed against this product and operating initiatives in 2019, we delivered significant improvement in our user acquisition efficiency and engagement metric compared with 2018. On top of dollar user growth, we also saw a nice growth in those number of users who refreshed feeds and, correspondingly, their total feed refreshment. Meanwhile, we kept our product innovation progress around multiple areas. In December 2019, we successfully launched the Oasis product, which demonstrated a good momentum on both user growth and engagement cost recently.On the monetization front, 2019 was a challenging year for us in many ways. In terms of our KA leasing, we will continue to deliver a double-digit growth for full year KA ad revenues in January term despite the macro headwinds and industry-specific cyclical issues. Weibo's social marketing value proposition continue to gain a broad-based recognition from brand advertisers, underpinned by teams with blended effort to reinforce our unique strengths in hot events, celebrity and KOL marketing, and also to tap into customer integrated brand plus performance marketing needs.On the flip side, our full year SME revenue grew 4% in the medium term, given a higher competitive performance ad market. To elaborate, the market faces a constant demand resulting from the macro and regulatory headwinds and the surge of ad inventory supply. The unfavorable demand and supply dynamic platforms enhance competition on our platforms for Weibo. Even though we substantially grew available ad inventories with the ramp-up in traffic, we vamp ad agency structure and develop our efforts in improving our offerings and the performance. We were not immune to such supply over demand market dynamics.Let me share more color on our operating results for the fourth quarter and priorities for the year of 2020.On the user growth and user engagement, in December, we're encouraged to see our DAU growth in terms of net addition of users year-over-year surpassed the growth in the past 3 quarters. Our feed impressions continue to deliver double-digit growth as well, beating our expectation. We attributed the robust growth of user traffic to certain adjustments in strategy and solid execution in channel investment products and video content offering last year.First, on channel. Since the start of 2019, we adjusted channel investment strategy, along with relevant product and operating efforts, to focus on enhancing user engagement, which resulted in higher use acquisition efficiency with disciplined sales and marketing spend.Second, on product and operation. We focused on product optimization to improve culture and content consumption and social interactive feature to solidify Weibo's core competitive edge, which contribute to robust growth in use of scale and engagement in 2019.Third, on video. We assessed the Weibo's competitive edge in leading market and drew more focus on PTC video offering on top of our existing advantages in media and hot trends verticals, which further increased our user time spend and engagement on video content. Now let me elaborate.On channel investments. In 2019, we strengthened our cooperation with domestic handset manufacturers and top application in content areas, including hot events and high-quality content offerings and optimized content consumption experience to many programs. As a result, our offsite user acquisition efficiency was partially improved. And meanwhile, our user retention rate has increased as well as we highlighted in-app past features last year.On use of product. To promote hot trend discovery and discussions, we will blend function of hot search, trend, topic product in 2019 with an upgrade of the operations to promote content exposure and enhanced synergies among these three products.To be specific, there are three areas of improvement to the upgrade, which are

[Fei Cao:]

Thank you, Gaofei, and hello, everyone. Welcome to Weibo's Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. Let's start with user metrics. In December 2019, Weibo's MAUs reached the 560 million, representing a net addition of 54 million users on a year-over-year basis. Weibo's average DAUs reached 222 million, representing a net addition of 22 million user on a year-over-year basis. Mobile MAUs represented approximately 94% of total MAUs. The strong growth was primarily driven by continued product improvement and content optimization, along with effective channel investment we made during the year.Turning to financials. As a reminder, my prepared remarks will focus on non-GAAP results and all comparisons on a year-over-year basis, unless otherwise noted. Now let me walk you through our financial highlights for the fourth quarter and the fiscal year 2019. Weibo's fourth quarter 2019 net revenue was $468.1 million, a decrease of 3% or 2% on a constant currency basis. Operating income was $168.9 million, representing operating margin of 36%. Net income attributable to Weibo reached $176.5 million, representing a net margin of 38%. Diluted EPS was $0.77.For full year 2019, total revenues reached $1.77 billion, an increase of 3% or 7% on a constant currency basis. Operating income was $662.2 million, at a similar level compared to 2018 and representing an operating margin of 37%. Net income attributable to Weibo reached $637.5 million, an increase of 2%, representing a net margin of 36% at a similar level compared to 2018. Diluted EPS was $2.78 compared to $2.73 in 2018.Let me give you more color on our fourth quarter and full year 2019 revenue growth. Advertising and marketing revenues for the fourth quarter 2019 were $405.9 million, a decrease of 3% or 1% on a constant currency basis. Mobile ad revenue reached $356.7 million, an increase of 2%, representing 88% of our total ad revenues, up from 84% last year.Full year 2019 advertising and marketing revenue reached $1.53 billion, an increase of 2% or 6% on a constant currency basis, with mobile ad revenues contributing 87% of total ad revenue, up from 83% in 2018.Let's start with KA. In the fourth quarter, our KA ad revenue was $191.6 million, a decrease of 7% or 6% on a constant currency basis. (inaudible) particular in KA revenue was presenting trend of faster transaction revenues, mainly resulted from impacts in domestic handset important shipment in the fourth quarter and less channel investment activities from our end. We collectively impacted KA ad revenue growth by approximately 6%. Industry-wide, the continued solid growth from FMCG sector and luxury brand category was offset by downward pressure from the entertainment sector, which has placed regulation revenues.Full year 2019 KA ad revenues reached $729.3 million, an increase of 8% or 12% on a constant currency basis, representing 48% of Weibo's total ad revenues. As we review overall performance of KA ad business in 2019, we are pleased with solid growth delivered from the KA sector. With that, macro economy growth slowdown and industry competition. The robust growth from our U.S. community base and our differentiated value proposition to key advertiser underpins the solid growth momentum for KA sector.We are particularly impressed with strong growth for FMCG categories, especially cosmetic and personal care, food and beverage and luxury brands as well as steady growth from automobile despite macro slowdown and industry challenges as we help build stronger bonds with these brand advertisers as an indispensable social marketing partner to drive their branding and performance month and maximize their content ROI.On flip side, we see flattish growth or even downward trend from entertainment, internet story and handset sectors as regulation and industry headwinds continued to weigh on the growth of these sectors and then to the marketing activities.Entering into 2020, we will continue to embrace market opportunities such as branded digitalization, consumption upgrade and 5G technology development to drive increasing value for our customers and partners and capture higher wallet share of digital advertising market in China. Despite a strong term, we are actively impacted from the budget cutback from advertisers whose businesses has been disrupted, following the coronavirus outbreak in China.Turning to SMEs. In the fourth quarter, Weibo's SME ad revenue was $176.4 million, a decrease of 2% or 1% on a constant currency basis. Full year SME ad revenues was $703.2 million, a decrease of 1% or an increase of 4% on a constant currency basis, representing approximately 46% of Weibo total ad revenue. The stabilization of the SME ad business in 2019 is a mixed result from the unfavorable demand/supply dynamics, of the performance ad market and our initiatives to navigate your market challenges in 2019.As we are entering to 2020, we will continue to make our efforts in enhancing ad performance, optimizing sales channels and incentive strategies, differentiating and standardizing our social ad products to retain existing customers, explore opportunities in undermanaged ad verticals and attract new customers to the platform. And obviously, uncertainties from the unexpected events such as the coronavirus outbreaks and the market competition, we continue to weigh on growth from SME business segment in 2020.Ad revenues from Alibaba in the fourth quarter was $37.9 million, an increase of 20%. The next rebound of ad revenue from Alibaba from third quarter reflects our strong cooperation with the e-commerce trend to drive value for these platforms and partners during e-commerce promotional season. Full-year ad revenues from Alibaba were $97.8 million, a decrease of 17% or 13% on a constant currency basis.Value-added service, VAS revenues, were $62.2 million in fourth quarter, a decrease of 4%. Full year 2019 VAS revenues were $236.7 million, an increase of 8% or 12% on a constant currency basis, mainly attributable to incremental revenues evolved from VAS revenue business acquired in the first quarter of 2018.Turning to cost and expenses. Total cost and expenses for the fourth quarter were $299.2 million, an increase of 1%. Full year cost and expenses totaled $1.1 billion compared to $1.06 billion for 2018. Operating income in the fourth quarter was $168.9 million, a decrease of 9%, representing operating margin of 36% compared to 39% last year. Operating income for full year 2019 was $662.2 million, at a similar level compared to 2018 and representing an operating margin of 37% compared to 39% in 2018.Turning to income tax and the GAAP measure. Income tax expense for the fourth quarter was $31.1 million compared to $14.9 million last year, largely attributable to the higher deferred tax charges recognized from fair value change of investment in 2019. Full year income tax expense was $109.6 million compared to $96.2 million. Net income attributable to Weibo in the fourth quarter was $176.5 million compared to $183.6 million last year. Net margin was 38%, at a similar level compared with last year. Net income for full year 2019 increased 2% to $637.5 million, representing a net margin of 36% at similar level compared with last year.Turning to our balance sheet and cash flow items. As of December 31, 2019, Weibo's cash, cash equivalents and short-term investments totaled $2.4 billion compared to $1.8 billion as of December 31, 2018. The increase was primarily due to the nice proceeds from 800 million senior notes issued in July 2019 for general corporate purposes and was partially offset by the investment activity as we made during 2019. In the fourth quarter, cash provided by operating activities was $253.2 million. Capital expenditures totaled $6.5 million, and depreciation and amortization expenses amounted to $6.5 million. On a full year basis, cash provided by operating activities was $631.7 million. Capital expenditures totaled $21.7 million, and depreciation and amortization expenses amounted to $25.8 million. We delivered approximately $610 million free cash flow in 2019, an increase of 33% year-over-year, representing our capability of delivering high profitability and generating strong operating cash flow.Before we turn to our financial outlook, let me talk briefly about coronavirus outbreak. On behalf of our company, I would like to pray for those individuals and families who are deeply impacted by the coronavirus outbreak and pay tribute to those who fight at frontline for public health and life saving. In response to live and fight the epidemic, we, along with SINA, have established a RMB100 million special purpose respond to aid the frontline medical staff with contribution on a plan to ramp pro rata basis from public donators and our company. We also launched a program to support our partners and customers such as MCN by increasing ad revenue share ratio and subsidizing ad inventories and platform resources to relieve their short-term operational prior from the epidemic.Lastly, let's talk about our financial outlook. As I expected, coronavirus outbreak is having a negative impact on our economy and post near challenges to businesses across the board. We, like other companies, are not immune to this challenge and are making efforts to navigate adverse situation. Due to the high uncertainty of the evolving situation, we have limited visibility on the fourth quarter revenue impact drawn upon by the epidemic. Based on our current best assessment of the potential effects from the epidemic, we anticipate our first quarter of 2020 revenue to decrease by 15% to 20% year-over-year on a constant currency basis. We will closely monitor the evolving situation and assess its impact on business on an ongoing basis and update the market if there is any material change. This forecast also 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:]

[Operator Instructions]. The first question comes from the line of Alicia Yap from Citigroup.

[Alicia Yap:]

My question is, given Weibo traffic actually has been positively benefiting from the increased user current spend and also the demand on getting the latest virus information so -- but then the aperture remains soft in the first quarter, which is understandable. Do you think the positive user traffic could have a longer-term benefit that could help Weibo retain advertiser budget allocation my share? And perhaps, translate to higher budget share in the second half of this year or even into 2021?And in relation to that, given the strong demand for paying games during this period, I wonder whether we will have gained back some of the ad dollars from the online gaming companies in the first quarter.

[Gaofei Wang:]

First, let me share some color on Weibo's traffic growth and the main driver to the outbreak. During the epidemic, we saw robust growth in Weibo's traffic. And with the total number of feed refreshment and impressions are double in the spring festival. And recently, this impression -- total feed refreshment impression grew over 50% year-over-year. The instant has brought back a considerable example of domain users to our platform, leading to a more diversified use of mix. The organic traffic also clearly improved our this user acquisition efficiency.The robust traffic growth during the epidemic was slightly attributable to the natural advantage we hold as China's leading social media platform. We're also grateful for the quickly response for launching our related functionality such as the coronavirus specific sub feed and the Super Topic.During this coronavirus outbreak, our strategic focus to highlight Weibo's value as a social media has been validated during this period. In the fight against the epidemic, Weibo has demonstrated unique value in information dissemination and discussion among media outlets, professional KOLs and general public. To be specific, Weibo enabled wider dissemination of official information from and government, brought professional opinion discussion to the public, and more importantly, helped general public receive quicker response from government agencies.Moving on to monetization front. In the near term, the epidemic swing on the overall economy and resulting in nationwide business disruption, specific on ad business, advertisers' demand and promotion activity were significantly impacted. As a result, several customers have canceled or postponed their campaign with us. In that sense, the near-term local traffic growth can now be converted directly into ad spend. That said, in the longer term, due to robust traffic, the upside in our -- upside in the traffic (inaudible) to strengthen Weibo's competitive moat and gain recognition from the customers.The robust traffic growth and user base expansion for some content (inaudible) could enhance our ability to capture our wallet from our corresponding industries, taking the game industry as an example. Currently, we saw a nice growth of ad spend from our gaming customer on both an annual and quarterly basis, benefiting from better game advertising demand.

[Gaofei Wang:]

The Weibo traffic during the epidemic also brought back a lot of old users, such as those user going in the 1970s and '80s, and that helped to improve our user interest in the education sector. We saw solid revenue growth for both brand and performance ad from education advertisers. Apart from the upside platform global traffic, the increasing result was also attributable to significant user growth in education vertical, boding well for us to further capture a dollar from the education industry.

[Gaofei Wang:]

Benefiting from traffic growth during the epidemic and also because the outbreak continue to disrupt the off-line marketing activities, we released a very positive trend for ad body shift from off-line to online. We have also taken the opportunity to launch new ad product to better fulfill advertising increasing demand and also to launch related products to fulfill this demand. Currently, also enhance the -- manufacturer have already tried this product, and we also see opportunity in FMCG and luxury brand to try this product with us and -- which may benefit our ad revenues in the second half.If we see to the short-term impact and look at our platform in the longer term, during the outbreak, Weibo has demonstrated indispensable value as the China's leading social platform and further strengthened our competitive moat with the ramp-up in traffic, our monetization front. We believe advertiser will also have a better understanding of Weibo's unique strength in social distribution and interruptions, which bodes well for us to further improve our monetization capability and capture higher social ad wallet share for us. Thank you.

[Operator:]

Next question comes from the line of Thomas Chong from Jefferies.

[Thomas Chong:]

My question is about Oasis. Can management comment about our marketing plan 2020 as well as our long-term strategy over the next couple of years?

[Gaofei Wang:]

Let me give you a decent update about Oasis. As I mentioned in the prepared remarks, we started internal beta test products in September and officially launched the product in December last year. Since the very beginning, Oasis has demonstrated unique value proposition in the content offering and supplement to Weibo's company ecosystem, leverage Weibo's traffic direction and the event operation. We saw great momentum in user engagement growth. In January, Oasis MAU surpassed 10 million. DAU you also see very notable growth, and it's also worth mentioning that the percentage of DAU who generate content on Oasis ramped up strongly in January as well compared with last month. Among these daily content generators, they are also a notable portion of regular user and mid-tier and long-tier vertical KOLs, which match well with our initial purpose of launching this product.

[Gaofei Wang:]

Entering (inaudible), user attention has been shifted to the involvement of the coronavirus outbreak and, the data activity has also been pretty limited due to the -- no chance to go out for travel, which have a certain impact on user's willingness to share and post content on Oasis. Moreover, as the epidemic period is not the best needle to promote the product, we have suspended part of our marketing activity accordingly. However, we will take the opportunity to further optimize the use of product and resume promotion after the outbreak is over and attract more users to Oasis. Based on the recent use of traffic, we see the similar level of the user traffic of Oasis compared with the time before the spring festival.After the epidemic is over, we'll review the marketing activities of Oasis product. And for our 2020 product content strategy, we encourage lifestyle-related content offering and distribution with specific emphasis on vertical that is suitable for expression through high-quality picture and short videos, such as photography, fashion, food and travel verticals as users from this vertical generally show better engagement in terms of content generation, consumption and social interaction.For the monetization based our initial top brands, a few brands show interest in promoting our Oasis, and there also might be some self-media promotion of Oasis as well. And -- but it will not be the first quarter -- late first quarter, early second quarter for the monetization to take place.

[Operator:]

The next question comes from the line of Gregory Zhao from Barclays.

[Gregory Zhao:]

So my question about market competition. So we have been seeing the coronavirus impact, how do you think about the market competition in 2020? And it would be great if you can help us try to understand calisthenics from both the inventory supply and merchant demand and also expectations on the organic growth of KA and SME advertising in 2020.

[Gaofei Wang:]

Let me first talk about demand side situation based on observation. As I just indicated, prior to the outbreak, we actually saw more positive trend than last year when we feed our initial 2020 budgeting. And also KA solid growth trend in November -- in January, sorry in January.Since the outbreak of the coronavirus, we believe the impact from this epidemic is beyond market expectation, and we are unable to assess when the epidemic will be over, which brought forth a lot of uncertainties to demand side of the advertising market and also our business.We see downside risks from the macro and advertiser channel plans and budget as well as industry-specific cyclical issues and especially for our key customers from the entertainment segment, which we see most of the order cancel for the movie sector. And for the e-commerce sector, we also see the impact on the e-commerce merchants due to the lack of activities and also the resumption -- delay of resumption of the e-commerce merchants due to the coronavirus outbreak.For sure, we are pleased to see our higher Internet penetration in our daily life. Certain verticals such as online education, we've been working on cloud services, see some structural benefits. Our demand from this sector to acquire users and improve brand awareness will be incremental to the market. We have taken opportunity to tap into the new customer base and actually saw nice growth from these sectors, particularly for the education sector. The demand is not only from the performance ad market and also from a branding market.Meanwhile, we also saw a positive trend of off-line to online ad budget shift from several existing customers. For instance, we see upside when the customers start to migrate their new product promotion activities from off-line to online. Accordingly, we roll off a specific ad solution to meet brand and SME customers online product release, which resonate well with our customers from the auto and handset manufacturer customers.Moving on to supply side factor. Well, for the performance end market, we do expect a tough competitive landscape as many platform continue to release a lot of inventories, even in a more attractive way since our platform wish to meet revenue target amid a weak demand side. And for instance, for the e-commerce sector, a lot of e-commerce merchants have now get back to work, and the protection is on hold. So there will be a lot of pressure on the demand side, especially for the e-commerce sector. And due to this favorable supply and demand dynamic, it will put pressure on the pricing side, which will have to increase the pricing during this year.For ourselves, we are not supply constrained, and we continue to ramp up our traffic and inventory accordingly, which also leads to a ad load decrease. However, this will be a room to further improve on the monetization of the incremental traffic in 2019 to address the under monetization issue. We will focus on optimizing our customer base and improving advertising technology in 2020.And to sum up, in 2020, our take is that there will be few uncertainly in the overall ad market, considering the epidemic's negative impact on the demand side. For the brand advertising, we see the impact will be temporary, and we see more visibility of the business. But for the performance end market due to the oversupply of the traffic in the market and the intense competition, we've seen more pressure in this market. But there will be more pressure on the off-line media part versus the online media part. So we maybe could benefit from this and also further improve our mind solution efficiencies to be more competitive in the performance end market.

[Operator:]

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

[Sandra Zhang:]

This concludes our conference for today. Thank you for joining us. We'll see you next quarter.