Weibo Corp (WB) 2014 Q3 法說會逐字稿

Thank you and good morning. Welcome to Weibo first-quarter earnings conference call. Joining me today are our Chairman of the Board, Charles Chao; our Chief Executive Officer, Gaofei Wang and our Chief Financial Officer, Bonnie Zhang. The conference call is also being broadcast on the Internet and is available through Weibo's IR website.

Before the mentioned presentation, I will 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 strategy statement filed on April 17, 2014 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 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 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.

(Interpreted). Thank you and good morning, everyone. Welcome to join us in Weibo's earnings conference call.

During this conference call, I will not only talk about our mission and the strategy to build Weibo as a social information platform, which I briefly touched upon in the past two calls and then elaborate on the progress we made in implementing the strategy.

First, let me start with our performance in the third quarter.

In the third quarter of 2014, we have achieved a strong growth in both revenues and the number of users. I would like to highlight that our investment in the mobile front and the TV interactive product has taken effect on the growth of our MAUs. Weibo's promoted trend product, which combines offline campaigns such as TV programs with online topics or trends have helped the advertisers to connect and synchronize their offline ad campaigns to the online audience.

Starting with our financial performance in the third quarter of 2014, our total revenue grew 58% year over year to $84.1m. Ad revenue grew 50% year over year to $65.4m with mobile ad revenue representing over 44% of the total ad dollars. We are experiencing continuous bottom line improvements this quarter.

Turning to our operating metrics. As of September 30, 2014, MAUs reached 167m, up 36% from last year and 7% from last quarter, while DAUs reached 76.6m, up 30% from last year and 10% from last quarter. Among our DAUs, [78%] of them come from mobile.

On our previous conference calls, we have introduced Weibo's three primary goals.

First, further leveraging our strengths in information discovery. Weibo will meet Internet and mobile users' demand for information acquisition and social interaction and to enable businesses to perform commerce transactions on Weibo.

Second, we hope to grow our user base in a healthy and rapid pace through further strengthening our leadership in creating and distributing information and reinforcing our brand influence in China as well as leveraging our channel resources.

At the same time, we and our strategic partners are working together to help enterprises and developers to build an information and service based ecosystem through making further investments in infrastructures such as payment, commerce and service tools.

In connection with these goals, in the third quarter, we made progress in the following four fronts.

First of all, in terms of our advantage in information discovery, Weibo is at a leading position in Chinese top tier content distributors. Starting this year, we have increased our investment in vertical information community and the vertical content creators through our revenue sharing, subscriptions and [tipping] function. By now, we have over 100,000 professional content creators covering over 23 vertical areas. Worth noting, the amount of long form content and short videos generated by these core professionals is five times of the amount in the second quarter.

At the same time, we have entered into vertical areas, which Weibo has advantage in both contents and the user scale, such as movies and the travel community. In the third quarter, we have carried out travel-related activities and movie reviews which has driven our user engagement and the content creation in these vertical areas.

To be specific, number of movie reviews or critics on Weibo platform during this summer break exceeded 4.3m which is 2.5 times of the review and the critics volume generated in the prior quarter. We plan continuously to focus on the improvement of content quality and the efficiency of information discovery.

Secondly, turning to our efforts in growing our user base, leveraging our leadership in information distribution. In the third quarter, our cooperation with important channel distributors and TV partners has become more standardized and scalable. For example, in television area, the popularity of hot topics or trends on Weibo is turning into a key indicator to measure TV rating and cast a significant influence over a TV program.

In the third quarter, Weibo has cooperated with over 80 programs. On one hand, TV plus Weibo has enhanced the user penetration and the Weibo brand awareness. On the other hand, it also facilitated the growth of the user activities and engagement which helped the TV advertisers to connect their TV campaign to the online audience.

Promoted trends is considered as a powerful ad product which connects offline brand advertisers to targeted online users. Through promoted trends and solutions, TV advertisers promote their TV campaigns among a wider range of online users.

In the third quarter, our TV-related ad revenues represented [16%] of total key account ad revenues, while TV related discussions has increased by 30% year-over-year basis. This demonstrates that Weibo plus TV business initiative can grow user engagement and Weibo monetization simultaneously. In the future, we will develop more O2O marketing product, which brings offline things to online.

Third, on the monetization front, we have been focusing on the developing marketing tools or solutions for over 700,000 enterprise accounts so that they can enhance their marketing and service capacity on Weibo platform. The wide adoption of our marketing solution and tools by enterprises combined with 7.92m Weibo payment users by mid-October has considerably improved their efficiency in marketing campaigns and led to the rapid growth of a number of our advertiser customers as well as the penetration into different industry segments.

For example, in the third quarter, cooperating with SINA Auto, we launched a marketing campaign called Automobile Carnival, which attracted over 30 auto brand customers to participate in and collected over 150,000 sales fees. This campaign helped the Weibo penetrate into automobile sales market and acquire more auto customers.

Looking forward, we will continue to optimize our marketing through offering and leverage such offering to provide tailor-made solutions for enterprises in different industries and achieve a win-win for Weibo's customers and users.

Last but not least, on the product front, in the third quarter we continued to optimize our in-feed and native ad product offering. As of the end of third quarter, the number of small media enterprise customers grew 15% quarter over quarter while CPM grew 14% Q-over-Q basis. We intend to open up our ad service platform to regular Weibo users in the near future. Through our efforts to continue to improve Weibo social interest graph recommendation engine, we believe, we will be able to optimize Weibo's advertising CTR.

In the third quarter, we entered a strategic alliance with Acxiom, a third party data management firm to provide a more targeted ad solutions to selected customers based on the synchronized data result between offline first party data and our online user data. With the continuing growth of Weibo mobile user base, we are confident that more advertisers will chose Weibo as their key media platform to target their existing offline customers as well as to reach potential customers online.

With that, I would like to turn to our CFO for the financial review. Thank you.

Thank you, Gaofei and good morning everyone. I will walk you through our financial performance for Q3 and then touch briefly on guidance.

For the third quarter of 2014, net revenue grew 58% to $84.1m. The revenue split between advertising revenue and Weibo value-added service revenue is 78% and 22% respectively.

Our advertising and marketing revenues for the third quarter of 2014 grew 50% year over year to $65.4 million, compared to $43.7 million for the same period last year. Total new revenue contributed by Alibaba was $27.5m in the quarter.

Other than the growth in Ali revenue, the resilient demand of our small and medium enterprise customers which leads to a 20% quarter-over-quarter SME revenue increase is the other key contributor to our revenue growth in the third quarter.

The number of SME customers who spent our platform in Q3 has grown another 50% from last quarter to be approximately 11,000. This number has not included over 2,000 individuals and enterprises spending through our self-service advertising platform. We are happy to [have a] more balanced customer mix in revenue contribution for Weibo which we believe lays a good foundation for our future growth.

Mobile continued to be the core driver of our growth. Among 77m DAUs, 78% access our platform through mobile devices. For the third quarter of 2014, mobile revenue accounted for 44% of advertising and marketing revenue compared to 39% in the prior quarter and 21% in the same period of last year. The trend in rising of mobile revenue percentage was largely consistent across our different customer segments.

Q3 is the first quarter for us to generate over 50% non-Ali advertising revenue by our promoted feed ad solution. The significant increase in ad dollar on the promote fees attributes to the stronger market acceptance of Weibo promoted fee product by both key account customers and SME marketers.

In the month of May, we extended our promoted feed solutions to our large customers. Since then, key account customers gained the first hand product experience by trying out such ad solution. Brand customers now have more choices of ad products on Weibo platform that can serve either branding or performance-based marketing campaigns. Promoted fee ad revenue generated by our key customers has more than tripled compared to the prior quarter.

We strived to enhance our social interest graph recommendation engine to further improve the relevance of advertising with users on our platform. The improved relevance of our ad will secure higher product demand and command a better price we can charge.

We generated VAS revenues principally from fee-based services, which include game-related service, VIP membership and data licensing service that we introduced in the fourth quarter last year in order to further monetize our user base and the content on our platform.

VAS revenues increased 93% year over year from $9.7m to $18.8m in Q3 2014. The increase [win] was mainly due to robust growth from gaming-related service and the addition of data licensing.

Turning now to cost and expenses, I would like to remind you that, unless otherwise noted, my comments would focus on our non-GAAP financial measures, which excludes stock-based compensation, amortization of acquired intangibles and the related income tax effect and a change in fair value of investor option liability.

For the GAAP financial measures as well as the reconciliation between the non-GAAP and the GAAP financial measures, please refer to our earnings release posted on our IR website.

In Q3, total cost and expenses were $87.8m, up 51% year over year.

Cost of revenue was $20.5m, up 42% from last year.

The gross margin improved to 3 basis points from 73% in the same quarter of prior year to 76% in the third quarter.

Operating expenses excluding cost of revenue were up 54% versus last year, primarily due to an increase in headcount related cost. Our marketing expenditures in the third quarter included a spending associated with user acquisition and the increase of user stickiness. We also incurred a cost in promoting Weibo payments among platform users and the merchants.

Q3 operating loss was $3.7m compared to an operating loss of $4.9m in the prior period.

Non-GAAP net loss attributable to Weibo's ordinary shareholders was $2.48m, down from a non-GAAP loss of $5.1m in the same period a year ago.

Our GAAP net loss attributable to Weibo's ordinary shareholders in the third quarter was $5.24m, which included $3.6m of stock-based compensation expenses, and $0.2m of intangible assets amortization expenses net of tax.

Non-GAAP basic and diluted loss per share for the third quarter was $0.01 compared to $0.03 per share for the same period last year.

Turning to balance sheet and the cash flow items. As of September 30, 2014, Weibo's cash and cash equivalents and short-term investments totaled $524m. The cash provided by operating activity for the third quarter was $52.5m. Capital expenditure totaled $4.2m and the depreciation and amortization expenses were $6m.

Turning to our fourth quarter 2014 guidance, we estimated that our net revenue for the fourth quarter will be between $102m and $105m.

This concludes our prepared remarks. We are ready for questions. Thank you.

Eddie Leung, Merrill Lynch.

Hi. Good morning. Thank you for taking my questions. Two questions.

The first one is about your guidance. I'm wondering if you could provide a bit more of granularity of the upcoming quarterly advertising revenues from Alibaba, large enterprises as well as SMEs, especially given the single days activities in -- from -- in Alibaba. So just wondering, whether we would expect some volatility or near-term spike in the Alibaba revenues which may not be sustainable into the new year.

And then secondly, it's also about your value-added services. Could you give us a rough breakdown of the proportion you earned from payments, subscriptions as well as games under your VAS business. Thanks.

Hey Eddie, this is Bonnie. I think your first question is relating the season -- potential seasonality impact on the Alibaba revenue. Yes, I think we have previously communicated with the investor group and also the analysts that for a single day those have quite significant seasonality impact on the Company's revenue. So our guidance for the fourth quarter has already reflected such seasonality and its impact.

And for your second question, I think you're looking for the breakdown of our value-added service. Our game revenue is about 50% of our total value-added service. That would be -- that's -- game is the primary composition of our VAS revenue.

Got it. Thanks.

Jin Yoon, Mizuho.

Hey, good morning guys. So a couple of questions.

First of all, you mentioned -- can you just clarify what you meant by 20% quarter-over-quarter SME growth? Is that growth in revenues or just in the number of SMEs advertising the number of -- advertisers are growing by 20% quarter over quarter? That's to clarify, number one.

And on that front, where are those revenues hitting? Is that hitting Alibaba's revenues, because the fact that they are taking inventory and reselling it to SMEs? Or is that actually hitting the normal third party advertising revenues?

And my second question is related to just the -- this quarter's performances. We saw a flat quarter -- or year-over-year or quarter-over-quarter growth on the third party advertising. Now just what the promoted trends and promoted tweets that you guys were talking about, can you just talk about how much of that contribution is coming from promoted tweets and the engagement based advertising and what we should expect for the fourth quarter? Thanks.

Hey Jin, this is Bonnie. Let me clarify. The 20% quarter-over-quarter growth in -- for SME growth were meant for the revenue growth. In terms of number of SME, the number of advertisers, that number is 15%. By end of the third quarter, we had approximately 11,000 number of customers, SME customers, using our [ad serving] platform.

For your second question, I think your question refers to whether SME revenue is categorized. SME revenue is considered part of the third party revenue. They are not considered part of the Ali revenue. So that should answer your second question.

And the third question you had is why Q2 third party revenue is relatively flat. I think we -- I think what happened here is we had a 20% growth Q-over-Q for our SME revenue but that was offset by a slightly declined [Kadon KA] revenue. And for the second quarter our [KA] revenue has included relatively robust display ads generated for the World Cup. So in the third quarter because that event is -- the period that covered of that event was relatively short, only a couple of weeks comparing about a month's time in the second quarter, so there is a slight drop in the [KA] revenue.

Right. Thanks for the color. Thanks Bonnie.

[Fai Tsang], Goldman Sachs.

Hi this is [Fai] on behalf of Piyush. Thanks for taking my question. Regarding your strategy to help TV advertisers to reach online audience, does their spending come from the TV ad budget or digital ad budget? Meaning is your platform competing with TV channels in wallet share or does it compete with other online-based social brand advertising platforms? Then I have a follow-up question. Thanks.

(Interpreted). The budget we obtain on the TV plus Weibo program is primarily from their online budget source.

What we have noted, for those advertisers who run TV campaigns, they generally have a simultaneous online budget to supplement the TV budget, on typical online video that can further promote their brand awareness. So the budget we're obtaining comes primarily from that source.

What we noted is that with the high interactive rate between the Weibo user and the TV audience we see a budget shifting from those advertisers who run TV campaigns. We believe that trend will continue as they see more benefit from the combined campaign efforts.

From a TV station perspective, they are happy to see those other online digital budget is shifting to Weibo as the discussion level on Weibo can actually help the viewership of a particular TV program.

That's very helpful. Can you also elaborate a little bit more on your cooperation with Alibaba? What's the latest ad format? Have you made incremental progress in backend data sharing? And also how's the feedback from advertisers in terms of ROI? Thanks.

(Interpreted). I think prior to this quarter we noted the typical cooperation between Weibo and Alibaba has been standard ad products such as display ads and some, I would say, some performance-based ads.

But if you notice, starting in the third quarter we have -- the focus in Alibaba cooperation has somewhat shifted to the vertical areas, such as movies and auto. As you probably know, those vertical areas have not been a strengthened focal point for Ali ecosystems. We're expecting to expand those vertical areas into such as financing, real estate, those areas to work more closely with Ali.

That's very helpful. Thank you.

Tian Hou, TH Capital.

Hi Bonnie, Gaofei. I've got a couple of questions.

One is related to your TV Weibo interaction program and it looks like it's very interesting and generates a lot of new users. So I wonder how many such programs are you planning to conduct in Q4? So that's the number one question.

Number two is your -- the sales activities for the vertical sectors such like automobile sector. In a short period, you're selling 15,000 or you're making 15,000 transactions. How do you make money on that? And some e-commerce companies make it on a [TME] basis or record revenue on a TME basis and some of them make it on a commission basis. So what kind of revenue model do you have on that front?

I have a couple more questions following those two so let's answer those two first. (Spoken in Chinese).

(Interpreted). There is some seasonality in terms of the TV plus Weibo cooperation. Typically in China the variety show season is high in Q2 and particularly Q3 during the summer break time. And so that -- our revenue would carry similar seasonality characteristics. However, for Q4 we believe it will be a bit challenging, but we are making efforts.

What we are looking at in Q3 is we have been working with a lot of programs but only 3 to 4 programs, TV programs that we have generated revenue. We believe in the future time, including Q4 and the next year, we are going to standardize our ad product, so-called promoter trend so that these promoter trends will be applied to more TV programs. With that we believe there will be more revenue to be generated.

Looking from a different perspective, if we look at the advertising spending Weibo associated with TV ad spending for Q3 we calculate that percentage which is about 2% to 3% of what an advertiser spends on TV. We are hoping to increase such percentage in the future time to a percentage level to 2% to 5%. With that, one thing we probably have to do is to get our promoter trend products even more standardized.

I can talk about the auto. Let me just clarify one number Tian has quoted of 15,000. I think in our -- in the CEO's speech we talked about 150,000. That relates to the Auto Carnival sales leads being generated. So we have not disclosed the number of transactions nor the vehicles being sold.

The revenue model right now we adopted for auto-related activities, we'll continue to carry this advertising model. We're looking for marketing -- sales and marketing solutions while the brand customers, when they see their transaction becomes a lot more efficient and ROI being enhanced on the Weibo platform, they have a stronger demand of our advertising products. So right now that is our main revenue stream or business model for this moment.

(Interpreted). From auto customer segment perspective, right now our -- most of the customers working with us on Weibo platform are somewhat limited to brand auto customers. The budget we have received from them are typical brand budgets. We have not going to a business -- sort of business model that we were taking a percentage or a share, a [take] rate of the transaction completed on Weibo.

But worth noting that on Weibo platform there is over 90,000 4S automobile shops. So in the future time we're expanding our marketing solution to this group of enterprises with more performance focused marketing solutions to be provided.

Thomas Chong, Citigroup.

Hi, good morning. Thanks for taking my questions. I have two questions.

First with regard to the Alibaba's revenue in the third quarter, can management provide some breakdown between PC and mobile? And should we expect the mobile revenue coming from Alibaba to trend up in the fourth quarter? If so, what's the percentage?

My second question is regarding the social e-commerce. Can management provide some color about how many Weibo payment users in the third quarter versus the second quarter and how should we think about the fourth quarter?

And a follow-up is about the number of enterprises start to use the Weibo payment solutions. Can management provide some color about the number? Thanks.

I can take the first one and the second and third one I think Gaofei can help you with.

In terms of the Ali revenue, the breakout of PC and mobile, we generally don't provide that specific split for a particular customer. I think I mentioned in my script or in my speech that the trend of the mobile percent -- rising in mobile percentage among all our customer segments has been very consistent. So in general the mobile percentage of spending by Ali has been increased I wouldn't say significantly or considerably, but the level of increase is comparable with any other customer segment such as our SMEs or our [KA] customers.

(Interpreted). We opened up our Alipay functionality to enterprise accounts by the end of the second quarter. By now about 50,000 enterprises have incorporated Alipay or Weibo Pay into our platform.

In terms of the transaction volume for enterprises who already had Weibo Pay enabled, their trends on volume is about 2 times of the volume of the second quarter.

Thanks.

Juan Lin, 86 Research.

Morning and thank you for taking my questions.

The first question is regarding sales and marketing expenses. Third quarter is a strong quarter versus the second quarter and we did see operating leverage apart from the sales and marketing items. So I'm just wondering what is the reason for sales and marketing expense to grow in proportion with your revenue and how do we project it going forward?

Hi Lin, this is Bonnie. I think your question is relating to the marketing expenses, the trend in the future time. I think, as you can see for the third quarter, we continue to see leverage coming out from our operation and our bottom line has been seeing continuous improvement. So for the Company perspective I think that trend will continue.

However, we still -- one thing I think I would like to emphasize is that the first priority for the Company which we have talked about a number of times during previous calls is to have the user acquisition to grow our user base. So we will strictly follow this priority in the future quarters. So that means that we will see spending on user acquisition and the spending relating to increased user engagement.

And also from a marketing expense perspective, our social commerce ecosystem is still in a very early stage development so there will be spending expenditures relating to our payment promotions to get more users and enterprises to adopt our payment system. So that would be a general trend you can think of.

Thank you. My second question is could you please share with us about the activation rate of newly acquired users in lower tier cities? Have you seen improvement of activation rate versus the previous quarter?

(Interpreted). In general, the engagement level of newly acquired users from second and third tier cities, their engagement level is relatively lower comparing to their -- compared to people from the first tier cities. So that gives our priority for next year that while at the same time of rapid growth in MAU, we're focusing on the enhancing of engagement level of the second and third tier city audience at a faster rate so that that would increase our DAU correspondingly.

What we note is for first tier city people, they have a lot of choices in terms of mobile applications. But that is not the scenario for the people from the second and third tier cities. Because of the difference in terms of the choice that they had among different cities, that gives our opportunity in the vertical area. Typically in the first tier cities, those vertical communities have already been quite satisfied or filled by other applications. But in the second and third tier cities we believe the advantage we had in the content creation and distribution, such as movies, music, gives a lot of opportunity for us to expand in these areas.

Philip Wan, Morgan Stanley.

Hi, good morning everyone. Thank you very much for taking my questions. It's George calling on behalf of Philip. I have two questions.

Number one is relating to your new users. So can you give us maybe the breakdown in terms of demographics, for example for the new users in the first tier cities versus lower tier cities?

And also what's the latest user acquisition trend post your latest update on the PC, the Version 6 launch in October?

And also this quarter you mentioned the mobile DAU percentage is still 78% which is unchanged from the previous quarter. So I just want to understand if this number will be stable going forward? This is my first question.

And also I have my second question here. So the second question is regarding your native or basic in-feed advertising. Can you give us the number of [KA] accounts that are doing this native advertising in the third quarter?

And also you mentioned that the CPM was up again about 14% quarter on quarter on top of the 30% quarter-on-quarter growth from last quarter. So I just wonder what the ROI is from these SME customers? Do you have any feedback from them? And potentially your CPM could go to what kind of level? Do you think it's too early -- that the room for the upside is still huge or you think it's going to be -- that the growth for the CPM will be maybe moderate going forward? Thanks.

(Spoken in Chinese).

Among the newly acquired users, about 80% is coming from second and third tier cities and Gaofei indicated among that, 80%, the majority of those are actually coming from the second tier cities. The people from third tier cities continues to be a pretty low level.

The second question, I think you had a question on the V6. The V6 version of the Weibo PC actually simplified the screen locking so that what we have noted is since the launch of V6 the timeline actually has had a slight increase since the new version being introduced in the market.

(Interpreted). The other change on the -- in the V6 version on PC is we have changed the information [speed] more like a card so that the impact of their advertising will be more consistent with their mobile ad.

I think the second -- I can take the second question for George. I think you had a question in terms of number of [KA] customers who used our in-feed advertising solutions for the third quarter. That number is -- I think the answer for your question is it's over 100, over 100 customers actually using the in-feed advertising solution.

Then you had a question on the ROI and CPM. For ROI this really varies among different customers, among different industries. So there's no particular number we would be able to share because it varies significantly from customer to customer.

And you also had a question in terms of whether there would be a ceiling in terms of our CPM. I think the trend of increase on CPM has been fairly consistent since the adoption of our promoter feed among SMEs also on the [KA] customers. And I would not say there would be a ceiling our CPM would be able to charge. It's really a matter of the CTR rate we would be able to help our advertisers to achieve. I'm sure you understand that the higher CTR rate we can achieve, the higher CPM price we can demand. So as far as we are concerned we do not believe there will be a ceiling on the pricing.

Ladies and gentlemen, this will conclude our question and answer session and the Weibo third quarter conference call has now concluded. We thank you for attending today's presentation.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.