Weibo Corporation
Q2 2016 Earnings Call Transcript

Published: 9 Aug 2016

[Operator:]

Hello and welcome to the Weibo Reports Second Quarter 2016 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Lydia Yu. Please go ahead.

[Lydia Yu:]

Thank you, operator. Welcome to Weibo's second quarter earnings conference call. Joining me today are Chairman of the Board, Charles Chao; our Chief Executive Officer, Gaofei Wang; and our Chief Financial Officer, Herman Yu. The conference call is also being broadcasted on the Internet and is available through Weibo's IR website. Before the management presentation, I'd like to read you the Safe Harbor statement in connection with today's conference call. During the course of this conference call, we may make forward-looking statements, statements that are not historical facts, including statements about 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 statement. 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 Form 20-F for the fiscal year ended December 31, 2015, filed with the SEC on April 28, 2016, and other filings with the SEC. Additionally, I'd like to remind you that our discussion today includes certain non-GAAP measures, which excludes 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 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 that are non-recurring in nature and 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 will open the lines for a brief Q&A session. With this I would like to turn the call over to our Chief Executive Officer, Gaofei Wang.

[Gaofei Wang:]

[Foreign Language] Thank you. Hello, everyone and welcome to Weibo's earnings call. [Foreign Language] On today's call, I will share with you our key developments and product user and monetization, as well the product we have made thus far in 2016 on some of our key initiative. [Foreign Language] First, I will discuss our Q2 financial results. Weibo continued strong revenue in user pro. Our total revenue reached 146.9 million, up 36% year-over-year. Advertising and marketing revenue reached 127.2 million, up 45% year-over-year with non-Ali ad revenue increasing 93% year-over-year. 68% of our ad revenue was from mobile. Non-GAAP net income in the second quarter was 35.5 million, up 225% year-over-year. Turing to users, Weibo’s monthly active users reached 282 million in June, up 33% year-over-year. Daily active users reached 126 million, up 36% year-over-year. In June, mobile users made up 89% of MAU. [Foreign Language] In the first quarter, we ran a large campaign around the Chinese Lunar New Year which resulted in strong user pro. In Q2, in our part [ph] of growing users, we focused on the retention of these new users and begin laying all the ground works for future monetization. To our sales force credit as well as advertising effeteness improvement, over the year, we noted a meaningful increase in a number of ad customers as well as average revenue for advertiser AK ARPA. Our efforts to continue enhance our ad products now improving the ROI for our customers. As Weibo developed with a reinforcing cycle of user growth, user engagement and monetization, this will be a strategic advantage for us to maintain our leadership in the mobile internet industry. [Foreign Language] In discussing our operational update for second quarter, I will cover Weibo’s thought progress and the area of user, content and customer. First, on user pro, our strategic cooperation with key domestic smartphone manufacturer whose market share has risen, Weibo has maintained strong mobile user pro. In June, our Mobile MAUs increased 40% year-over-year, with mobile MAUs from domestic smartphone growing 98% year-over-year. Our strategic collaboration with domestic smartphone manufacturers is centered around two dimensions. First, we work with the smartphone manufacturers to improve the user experience of Weibo on their handset. Check our partnership with Huawei as an example. Through product integration with their operating system, the user experience of Weibo on Huawei phones become much better. Our MAUs for Huawei phones increased 66% year-over-year and DAUs increased 134% year-over-year. Another dimension of our partnership is to enable smartphone manufactures to leverage Weibo at the CRM and marketing platform to directly engage with the customers, to obtain customer insights and deliver targeted online marketing campaign to increase our brand awareness and influence. As the results of our strategic collaboration, we know the domestic smartphone brand have become hot brands on Weibo. Our strategic collaboration with domestic smartphone manufacturers is becoming a part of your online marketing strategy, which in turn will be reinforced and solidify our relationship. [Foreign Language] On the product fund, videos are top priority for us and we have continued to strengthen our investment in video. In Q2, we formed the partnership program and sign up many multi-channel networks, AK, MCN, who represent video content reader to broaden the video offering on Weibo. We also made great technological progress in the era of video broadcasting experience and Weibo’s recommendation engine for video feeds. Resulting in strong video consumption, daily video post like theaters on Weibo in June grew 38% sequentially. And daily video views in June were 235% sequentially. These milestone achievements taken together are driving the growth of video traffic in Weibo, as well as how we will continue to grow overall MAUs and DAUs. Our video operators are helping MCN develop their business on Weibo. Check new studio media for example. In the second quarter, video views of new studio media videos on Weibo reached a total of $160 million up 628% quarter-over-quarter. In the second half, we’re focused on building at Weibo’s echo system for content creation and consumption. [Foreign Language] Turning to live video, live video has inherently natural to be one Weibo due to its anytime, anywhere, real time and multimedia nature. This is an important focus for us. And the hottest category of live video hosted by celebrities and internet influencers, we’re with ETA [ph] Technologies to enable their hot keys which enable live broadcasting from any mobile device to share their broadcaster’s content on to Weibo and allow Weibo fans for engage. By pairing with API, we quickly entered the live video. In Q2, they were over 10 million live streams broadcasted on EE, 116 times higher than last quarter. In consideration of the complexity of live video technology and the variety of their vertical content, we are forming strategic collaboration with hot content providers for other categories live video, build a unique live stream experience for both the broadcasters and their fans. For example, in the media category, we're partnering with the CPTV. People’s Daily and other official media organizations to provide professional media broadcasting. In the e-commerce sector, we plan to work with partners like [indiscernible]. Our platform strategy allows Weibo to quickly enter the live video space in the second quarter. For example, CPTV use Weibo to broadcast 60 live sessions in Q2 which derived nearly 5 million views in aggregate. As live video requires a higher threshold for content creation, our strategy is the position Weibo as a social media platform and work of third parties to enable their broadcasters to stream and build their fans base on Weibo, In addition to helping broadcasters till their social asset in Weibo to enable more session development of their fan space. We hope to find a win-win monetization model with third parties strategic partners. [Foreign Language] Trying to content, we aim to build out a content ecosystem for video. On the one hand, incentivize our users who are getting videos and at the same time, work with content partners to offer a larger volume of quality original content. [Foreign Language] On our last call, we shared our content track and discuss that we move from growing content in general to becoming more vertical industry focus. We work with key opinion leaders of its each industry vertical to provide them with operational support, incentive some to share more content and gradually extend our collaboration of the key organizations of each industry. We hope to develop the reinforcing cycle from account content monetization. In Q2, we reach out the key organization within e-commerce video, live broadcasting and other factors and formed over 200 partnerships. In collaboration with these organizations, Weibo held a three weeks long KOL promotion and voting at festival that commentated into an award’s nights in June for top KOLs in China. During the KOL festival, super KOL festivals were viewed almost 10 billion times. Super KOL festival allows Weibo to solidify relationships with key top media organizations in the Weibo industry from which we will collaborate in area content creation, fans development and modernization. In doing so, we hope to help these organizations learn to better leverage Weibo to expander their size and influence in their respective industry. We believe that our strategic corporation will not only increase the number of KOLs and their engagement on Weibo, it will also increase Weibo’s monetization potential in these industries. [Foreign Language] Lastly, turning to monetization, our strong ad revenue growth can be attributed for the center of our SME business resulting from an increase in a number of SME customers as well as product upgrades such as our app download ad product which improvement ad of Weibo to promote ads. In Q2, the number of SME customers reached 906,000, up 104% year-over-year and our SME revenue grew 107% year-over-year. As Weibo’s user base expanse, our competitiveness and interacting app adjust from fast moving consumer goods and believe the advertisers are also improving. In Q2, the number of KA customers - the number of large KA customers increased 45% year-over-year and our KA revenue increased 73% year-over-year. [Foreign Language] In Q2, we upgraded Weibo’s promotive video ad products and self-monitor video ad to KA SME customers. There were 81 KA and 3,460 SME customers will purchase video app this quarter. Video app has boosted Weibo’s revenue in two ways. First, video app helps us expand our customer space. For example, a number of television network and online video platform experiment that with Weibo’s video app in Q2. This helps grow the number of large KA customers in Q2 by 45% from the prior year. Secondly, video app helps us get a bigger share of our customer’s ad. As video consumption on Weibo expanse and as 4G, Wi-Fi becomes more prevalent in China; we believe video advertising will be a major revenue driver for us. [Foreign Language] In Q2, we also launched deep-link which enables each portion of Weibo’s metrics to better link to the app of the advertiser. Considering the explosive growth of the app market in China tapered off, we believe mobile app will more and more rely on large existing act of mobile user space to divide this traffic. As a leading source for mobile traffic, and an online platform for content stream, Weibo’s deep-link, our performance based ad product and help non-high frequency app increase their user activeness. We experimented deep-link with SME Q2 and test result show that by using deep-link, the cost per user activation decreased 21% compared to our previous app download product. Through deep-link, non-high frequency apps can effectively utilize bandwidth content and app format to acquire NV activate users. With deep-link, we hope to gain a larger share of ad from internet customers. [Foreign Language] In Q2, we also launched lead apps targeting verticals with high ARPU and longer customer purchasing cycle, such as the auto industry. As we improve user data analytics and ad measurements and enhance our targeting, we are adding features such as a lead form toward advertising to support auto purchases requiring long decision making process. For example, Mercedes Benz ran a brand campaign for their C-Class model where potential customers filled out a purchase and tent form directly from Weibo’s information floor. To obtain more product information, using Weibo’s lead ad, their cost for sales lead was reduced by 78% compared to prior ads. Overall, revenue from auto ad customers in Q2 increased 200% year-over-year. In the future, we also helped to equip the business with the ability to private message interested customers subsequent to seeing a brand campaign which we believe will become an important differentiation for social marketing, especially for vertical industries with longer decision making process such as auto, real estate and finance. [Foreign Language] With that let me turn the call over to Herman Yu for financial updates.

[Herman Yu:]

Thank you, Gaofei, and good morning, everyone, and good evening to those of you in the west. Welcome to Weibo’s second quarter 2016 earnings call. I’ll give you the top level numbers. For the second quarter, Weibo’s total revenues reached $146.9 million, up 36% year-over-year, 44% on a constant currency basis. It’s eating the company’s guidance between $138 million and $143 million. Non-GAAP net income reached $35.5 million, up 225% year-over-year. Non-GAAP diluted EPS was $0.16 compared to $0.05 a year ago. Adjusted EBITDA reached $38.8 million, up 152% year-over-year representing an adjusted EBITDA margin of 26% compared to 14% last year. Let me give you more color on our revenues. Advertising and marketing revenues for the second quarter reach $127.2 million, up 45% year-over-yeah, while on a constant currency basis 53%. We continue to see strong adoption of Weibo social marketing with total advertisers reaching 906,000, up 104% year-over-year. Mobile revenue in the second quarter made up of 68% of Weibo’s total ad revenue and was up 58% year-over-year, or 67% on a constant currency basis. As online ad in China budget shifts to our mobile, Weibo is well positioned to benefit from this trend. Turning to SMEs and KAs, revenues from small and medium size enterprises and key accounts together was %114.3 million, up 92% year-over-year, or 104% on a constant currency basis. This is an acceleration from a year-over-year growth of 50% in the first half of 2015 and 82% in the second half last year on a constant currency basis. The strength was Weibo’s advertising was led by our SME business which grew a 107% year-over-year or 119% on a constant currency basis. On the SME agency side as Gaofei explained, the growth can be attributed to an upgrade of our app downloaded promoted feed, EunJu Cho [ph] as well ad effectiveness improvement major promoted feeds. In the past, SMEs primarily purchased performance ads. Earnings this year we enable SMEs to also purchase brand advertising. The opening up of various app product lines to SMEs, not only increases the average spending of our SME customers but more importantly also increases the overall return of the performance ads that they place. For example, customers like YMT Holdings Limited across border e-commerce company weibo.com. B to C online store for fashion shoes, apparels and bag are showing us they are running a brand campaign along with buying promoted ads, not only increases brand awareness but also boost the return of the Weibo’s performance ads. Another driver of our SME business is the continue momentum of Weibo’s self-service, which enables individuals and businesses to perform online marketing with prepayments as small as RMB100 or 15 U.S. dollars. Fans marketing in China is growing rapidly as many individuals and SMEs realize that they can perform social marketing on both PC’s and mobile devices by opening a social count without having to develop their own website HTML5 site on mobile app. Fans marketing can be very effective because it allows one to market to his or her opt in advance. And two, the blogger can do this repeatedly over the lifespan of the fans. Moving on to KAs, revenue from key accounts, mostly in large brand advertisers in the second quarter was quite robust, reaching $44.3 million, up 73% year-over-year, or 84% on a constant currency basis. The strong performance of our KA business can be attributed to both strong customer adoption of Weibo social market as well as increased spending per advertiser. As Gaofei mentioned, the number of our large KA brand advertisers grew 45% year-over-year. During the quarter, we saw strong growth from key sectors such as fast moving consumer goods industry as well as tech industry which include internet services, e-commerce and smartphone manufacturers. The automotive sector which also apply spark for us this quarter as we launch a lead ad product, that allowed average auto advertisers to just form lead generation directly from Weibo’s information feed as part of their brand campaign. Revenue from Alibaba was $12.8 million, compared to $28.4 million a year ago. With SMEs and KA revenues, now making up 90% of Weibo’s ad revenue in going quite robustly, we should see healthy revenue growth for 2016. Moving on to value-added services, Weibo’s VAS was $19.7 million in the second quarter down 1% year-over-year or up 4% on a constant currency basis. On a constant currency basis, membership revenue was up 95% year-over-year. Data licensing revenue was up 9% year-over-year and game services were down 30%. Membership fee our largest VAS category is growing rapidly as a result of strong growth in new members. Game services revenue on the other hand was down due to revenue from PC games trending down and we hope to license new mobile games in the near future to reignite the game revenue growth. Turning now to cost and expenses, total non-GAAP cost and expenses were $112.2 million, up 14% year-over-year. Cost of sales was $40.1 million up 20% year-over-year, while operating expenses totaled $72.1 million, up 11% year-over-year. The increase in non-GAAP cost and expenses was primarily due to an increase in bandwidth costs, resulting from the strong video consumption and overall growth in traffics, increase in marketing expenses and VAT associated with higher revenues and higher personnel-related costs. Non-GAAP net income was $35.5 million, up 225% year-over-year. Non-GAAP net margin in the second quarter reached 24% compared to 10% last year and 14% last quarter. Weibo is showing robust operating leverage due to strong revenue growth as well as the platform nature of our business model. We expect Weibo’s profit margin to continue to rise over the long-term as Weibo’s revenues scales. Turning to balance sheet and cash flow items, after June 30, 2016, Weibo’s cash, cash equivalent and short-term investments totaled $396.5 million. Cash provided by operating activities for the second quarter was $24.1million. Capital expenditure totaled $1.5 million and depreciation amortization expenses were $3.5 million. Weibo shares floated in the market, according to our ADR depository firm approximately 17% Weibo shares outstanding are available for trading in the open market. Turning to Weibo’s third quarter 2016 guidance, we estimate that Weibo’s total revenues for the third quarter 2016 to be $168 million and $173 million which does not take into consideration of foreign exchange rate fluctuations. Before I turn the call over to the operator, let me quickly recap our call. We continue to see momentum Weibo’s traffic with both MAUs and DAUs going above 30% year-over-year. As we expand to build up a social platform for video including short videos and live video with key industry partners, we are embarking on a major internet trend particularly video over mobile which is a huge and rapidly growing market in China. We are in a unique position to leverage Weibo stream into our video offering such as the reality of Weibo, our SIG recommendation engine which tags and recommend content based on user interests and social relationships and our fans platform equipping creators and broadcaster with user traffic, engagement and monetization. The unique propositions coupled with our focus our user experience in building the ecosystem for video content creation and consumption put us in a good position to become a top UGC video platform in China. On a monetization side, we are introducing new products and ad technology at incredible pace to increase ad effectiveness such as deep link and lead ads. As we enter the second half of 2016, Weibo is well positioned to continue our ad revenue momentum leveraging the ad budget shift to mobile, social marketing and video advertising. Our strong execution coupled with the powerful nature Weibo is translating into strong operating margin leverage. As our revenue scales, we believe there’s much for Weibo’s profit margin to further expand. With that, let’s now turn to Q&A. Operator, we are ready for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Alicia Yap of Citigroup. Please go ahead.

[Alicia Yap:]

Hi, Good morning, Gaofei and Herman. Thanks for taking my questions. I have two questions. First question is regarding the ad revenues breakdown by product line. Can you share with us what is the percentage of the promoter feeds versus display ads this quarter? And if we look into next year, what would be the product monetization mix after the video revenues ramp up?

[Herman Yu:]

Hi, Alicia. Yeah. Our advertising is broken up into three different type of advertising. One is a promoted fee as you talked about, the other is display and the other is topic that’s associated with the key words. So for the second quarter, our promoted ads was 53%, and our display ad is about third of our revenue. The other question you mentioned was in terms of videos. So we think that video is really part of the display ads. So I think going into next year with regard to the mix of display and promote I think we’ll have to see as we get into it. It’s hard to estimate that a year out as we just started promoting our video ads.

[Alicia Yap:]

I see, I see. Then on my second question is how regarding the margin. So it’s a very impressive improvement here for the second quarter, will there be any change in the landscape just in case that will lead to you to spend more expenses that would prevent the margin from continue improving? And then what would be time novelized target margins range that you could achieve or for example into next year. Thank you.

[Herman Yu:]

Yeah. If you look at our expense trend lines in our overall net margin trend lines over the last few quarters, we’ve been pretty consistent. If you look at our revenue growth compared to our expenses, our expenses have been pretty much maybe half or a little bit half of our revenue growth and you’re seeing that margin operating leverage. So right now, as going into the first half and the second half of this year, we continue to see the operating leverage to continue as our revenue continues scale. So I think that if you look at our biggest differentiation as a social media is that our content is user generated it. So that allows us as a revenue grows there is some much of associated costs with it. So I think the bottom line as you should see our operating margin for this year and next year to continue to increase as revenue increases.

[Alicia Yap:]

Okay, great. Congratulations on a good result.

[Herman Yu:]

Thank you, Alicia.

[Operator:]

Our next question comes from Claire Cao of Morgan Stanley. Please go ahead.

[Claire Cao:]

Hi, Herman. Thanks for taking my question. My first question is a follow-up on the margin profile. We notice that non-GAAP growth margin improved both sequentially and on year-over-year basis in the quarter which seems to be contrary to the market expectation of margin pressure because that increasing bandwidth cost. So if can management give us some color, what is driving or offsetting the bandwidth cost increase in the quarter? Thank you.

[Herman Yu:]

Good morning, Claire. Yeah with regards to bandwidth cost, it’s like you’re seeing our video are taking off very rapidly and seeing our traffic going very rapidly. But same time the operation side, our technology team has been very good at producing a lot of a milestone to improve delivery of a video at the same time to reduce the amount of data. So I think you can see this as a lot of technological breakthrough, at the same time in the second quarter, we also started working with third parties to negotiate our bandwidth costs. So we have a couple of third parties that we work with bandwidth and we made significant unit cost improvements vis-à-vis prior quarters. So I think with this kind of strategy the first diversified bandwidth purchased with third parties especially working with Alibaba that the Ingo [ph] at the same time and also with the technological advances, we’re able to keep our bandwidth cost at bay while increasing our video in overall traffic.

[Claire Cao:]

Thanks. I have a follow-up question regarding on live broadcasting services. So I noticed there we launched great key functions for our live broadcast services starting from the early second quarter. So I’m wondering, currently is Weibo taking a cut out of the cross selling and how you booking the revenue? Thanks.

[Herman Yu:]

Yeah. So, hi, Claire. Yeah, so right now as Gaofei talked earlier about live broadcasting, the primary partner that we have is working with the EE, right. And the way it works is that they generate the GMB the this behind their platform and they’re paying for their bandwidth and so forth. And with regards to us taking revenues share, at this current stage, we’re not taking the revenue share from them. I think that we’re looking, we’re helping them enabling their broadcast on Weibo delivery successful, that’s usually number one, right. As Gaofei mentioned, our - us add the platform first is to help their broadcast and set up accounts to help them come up with really good content and then really the third step is then talk about moderation. So as this whole business model builds on a lot of broadcaster from EE comes on to Weibo will enabling them to do to growth traffic and also new users to test and we’ll also then consider driving share sometime down the road. But for the second quarter, we have not taken any revenue share from them.

[Claire Cao:]

Okay, that’s very helpful. Congratulations on the strong result.

[Herman Yu:]

Thank you.

[Operator:]

Our next question comes from Juan Lin of 86 Research. Please go ahead.

[Juan Lin:]

Hi, good morning, Gaofei and Herman, and congratulations on a very strong result. So my question is related to your video ads and self-service ad system, I’m wondering what is the current progress of your video ad in terms of revenue contribution, how does the price fixed rate and ROI, we hope video ad compare with a regular feed ad? And secondly, what is the current revenue generation from the self-service system? Thank you.

[Herman Yu:]

Hi, Juan. Yeah. Good morning. Yeah, we have not disclosed video ads. I think our strategy this year for video ads is to trying to get proliferation as we just launched this thing. The whole idea this year is to try to get a lot of customers to actually try our video ads. So while our list price for video ads is much, much higher than our other inventories. We’re trying to allow a lot of customers to test. So you’re not going to see moved CPM at this point. But we envision as there is more of option for a video ads. You see us probably pullback on a discount further down the road. With regards to our self-service ads, that’s about a quarter of our SME advertising.

[Juan Lin:]

Thank you Herman.

[Herman Yu:]

Thank you.

[Operator:]

Our next question comes from [indiscernible] of Credit Suisse. Please go ahead.

[Unidentified Analyst:]

Hi, good morning, Gaofei, Herman, thanks for taking my question, congrats on very nice quarter. My question is regarding a portion of revenue was coming from the revenue sharing key opinion leaders, can you quantify how much of that coming from that type of ad format and what’s our set of content basically, do we recognize COGS on that? How much of - with the cost of revenue, how much of the revenue share have actually booked within the COGS? The follow-up questions second of the potential business tax impact from the new ad regulations, could you maybe quantify a little that I get that be pretty meaningful that some point quantification will be helpful. Thank you.

[Herman Yu:]

Good morning, Evan. Your first question was on how much revenue were booked we’re booking from KOL. Is that correct.

[Unidentified Analyst:]

Yes, yes.

[Herman Yu:]

Yeah. So Evan, actually I would don’t have a specific number for KOLs. As you can see from our total advertisers, we have over 900,000 customers per quarter is not able to - we’re not able to tag which one is our KOL. The way actually works is if you look at our fans marketing, the whole idea is that on Weibo, people want to build their fan base, so that they get recognized, so that they get a whole fan base. So you might have a few a KOL that does this and others who want to be like certain KOLs, especially if you look at Weibo now you have a lot of e-commerce KOLs, you have people who do live videos, people who do a short videos and so forth. So it’s more like a pyramid where you have top KOLs driving examples and then you have a lot of the materials and you have to the kind of the grass root who want to be KOLs. So as a result of that, you’re seeing our whole SME revenue growth. So it’s really hard to say which specific part relate to KOL, but it’s really that whole pyramid of trying to do your own personal branding on a social media. So I would probably just characterize that all of our SMEs - all of our self-service is related to fans marketing and then probably a portion of our SMEs to the channel as that kind of fans or marketing. Okay, and then with regards to the business that you talked about, my understanding is that in the second quarter, there’s a new regulation that has a 3% VAT on search revenues. As you probably know, this will impact us very minimal, as we have very, very little revenue coming from search right now. [Foreign Language]

[Gaofei Wang:]

Our understanding of the new tax rate relation is that basically has standardize a lot of the current policies. [Foreign Language] Yeah. So the regulation, our understanding is there, is focuses on advertising that are not very standard and whereas for social advertising, we believe especially native ads we think that this is something that possibly positive based on the new government regulation policy trend. [Foreign Language] Thank you. Next.

[Operator:]

Our next question comes from Wendy Huang of Macquarie. Please go ahead.

[Wendy Huang:]

Thank you. First, I want to clarify your comment on the VAT just now, because in my understanding that 3% so called VAT construction fee that have actually in 2013 and effectively applied to all advertising revenue, so does that mean Weibo has always been paying this 3% fee?

[Herman Yu:]

Yeah. We have.

[Wendy Huang:]

Okay. And second question is also -

[Herman Yu:]

The key issue is that when Weibo - when we generally revenue, all way of revenue, our advertising revenue whereas for some of the search companies their revenue is technology services. So historically they don’t call themselves advertising revenue.

[Wendy Huang:]

Okay. I Understand. So secondly, I noticed that some of the live broadcasting custom like Incur [ph] recently increased that the revenue share was their key performers. So are you also actually seeing the pressure to increase the revenue share with some of your content, video content providers?

[Gaofei Wang:]

[Foreign Language] Gaofei mentioned that, I’ve spoken in earlier that our entry into direct broadcasting is through our investment with EE app. [Foreign Language] So under our investment model, the investee or the company that we invest and that we will be generating the overall revenue and there is a cost associated with that revenue, obviously we think that they will play with under the condition of the market. And what we’re seeing from our side is that we’re seeing a lot of the broadcasters, live video are want to be on Weibo they want to increase their brand influence and also expand fan base. [Foreign Language] That the space for live video is very big and we also see that it being very competitive. We were - I’m happy to see that as entering live video at a very fast pace. We’re able to secure a lot of celebrities, a lot of the media accounts and one of the big KOL counts. And through partnership with ‘E’, we hope to also be able to secure a good market share with regards to the grass roots during kind of these live shows, live shows.

[Wendy Huang:]

Thank you. My last question is brand advertising trend that you are seeing from SMEs and so I think you get some great example about SME are using, using the platform to do the campaign. So can you give some color on the typical standing by the SMEs on the brand advertising and or so do you expect your almost 1 million SME customer based to all kind of adopt is actually in the long-term and also is this is case how were the ARPU standing from the SME versus KA to different. Thank you.

[Herman Yu:]

So to answer your question, so under SMEs we have two type, we have the self-service and then we also have SME. The ones are doing brand advertising are the ones through the channel. So we actually see a good portion of our SME through the channels as that could good branding. We see that probably more at the large, small enterprises and also the medium size enterprises. So I think we see a good segment being to do those. I think at the day SMEs in general are still trying to do performance ads but we are cases where when they make their brands better know that when they do performance ads, you are seeing much more engagement as a result of people knowing their brand. So I would just say that the SMEs through the channels there is a good segment of that that has that potential to be able to do better to do just promoter feeds.

[Wendy Huang:]

Thanks Herman and Gaofei.

[Herman Yu:]

Okay. Okay, next question.

[Operator:]

Our next question comes from Alex Yao of J.P. Morgan.

[Alex Yao:]

Hi, good morning, everyone. Thank you for taking my question and congratulations on strong quarter. I have two questions. Number one is you guys have been able to grow your user base reasonably fast over the past few quarters without incurring much step up in terms of sales margin cost. So I am just wondering from content perspective, what is the content that is driving the user growth i.e. what are the content that’s most few to the new users?

[Gaofei Wang:]

[Foreign Language] So you are seeing a lot of our growth from second, third and four tier cities and the kind of content I was driving a lot of new user growth for example like celebrities. We are also seeing a lot of media content such as finance, such as sports especially as we’re into Olympics, you can see us getting a live traffic there. [Foreign Language] So the way we have set up our self, media allows us to go into other vertical content such as food and we would able to do is allow a lot of these content providers to be able to setup account to generate builder stand base and at the same time build a traffic and monetization that we have allowed, so allows them to create good content, create families, increase event, at the same time be able to monetize more activities that they do. So we think that the monitor we have put in place in addition to celebrities and media, we can actually expand this to other verticals. [Foreign Language] So another part of our content is trying to aggregate more video related content from various different industries that would actually help us acquire more user growth and traffic from people in Tier 1 cities and also people from younger generation. Okay Alex?

[Alex Yao:]

Yes, sir, thank you very much. Then I have a quick follow-up on the video comes in strategy, so in your short video broadcasting vertical, you have content as generating and broadcasted by professional haul such CCTV and then you also have content broadcasted by the KOLs or even the grass root users. So just want to understand how the user behave differently on your video broadcasting vertical compares to peers such as YY and INCA, In, would you be able to elaborate on what kind of content you are seeing the biggest demand and then maybe the metrics such as percentage of usage between these two anything related about will be helpful? Thank you.

[Gaofei Wang:]

[Foreign Language] We can see that YY in the traditional show stage form of live video is mostly coming from UGC, so from those. [Foreign Language] So for INCA, is very similar to YY’s model except it’s more mobile based, where we have started enter into a live video is focused on celebrities, on media and also on KOLs and trying to get people from these various domains to be continue exclusively on Weibo. [Foreign Language] So in the second quarter in addition to the key strategic domains there we are focused we also have live videos or live broadcasting to our grass root users who have verified accounts. And what we are seeing is that those are getting a lot of traffic or grass root users and also big KOLs. And we also see that there is people who are interested in media accounts but we are seeing there actually get a tipping and monetization publicly is not as strong as the other two that I mentioned. [Foreign Language] So our strategy is to leverage media content and gross root to increase coverage of live, get more people into a watching live and then to leverage KOLs to be able to monetize better from this segment. Okay, thank you very much Alex.

[Alex Yao:]

Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Lydia Yu for any closing remarks.

[Lydia Yu:]

This concludes our call for today. Thank you every one.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.