Weibo Corp (WB) 2016 Q2 法說會逐字稿

Hello and welcome to the Weibo report Second Quarter 2016 Financial Results conference call. All participants will be in listen only mode. (Operator instructions) After today's presentation there will be 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.

Thank you operator. Welcome to Weibo's Second 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 Herman Yu. The conference call is also being broadcasted on internet and is available through Weibo's IR website. Before the management's presentation, I would 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 risk and uncertainty. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Weibo assumes no obligations 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 31st, 2015, filed with the SEC on April 28th, 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 gained from the 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 line 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. Hello everyone and welcome to Weibo's earnings call. On today's call I will share with you our key developments in products, users, and monetization as well as the progress we have made thus far in 2016 on some of our key initiatives.

First, I will discuss our Q2 financial results. Weibo continued strong revenue and user growth. 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 (inaudible) ad revenue increasing 92% year-over-year. 68% of our ad revenue was from mobile. Non-GAAP net income in the second quarter was $35.5 up 225% year-over-year.

Turning 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.

In the first quarter we ran a large campaign around the Chinese Lunar New Year which resulted in strong user growth. In Q2 in addition to further growing users, we focused on the retention of these new users and began laying out the groundwork for future monetization. To our sales force credit as well as advertising effectiveness improvement over the past year we noted that a meaningful increase in a number of our customers as well as average revenue per advertiser, aka, ARPA.

Our efforts to continually enhance our ad products are 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.

In discussing our operational update for second quarter, I will cover Weibo's progress in the area of user content and customer. First on user growth -- by keeping our strategic corporation with key domestic smartphone manufacturers whose market share has risen rapidly, Weibo has maintained strong mobile user growth. In June, our mobile MAUs increased 40% year-over-year with mobile MAUs from domestic smart phones growing 98% year-over-year.

Our strategic collaboration with domestic smartphone manufacturers is centered around two dimensions. First, we work with the smart phones manufacturers to improve the user experience of Weibo on their handset. Take our partnership with Huawei as an example. Through product integration with their operating system, the user experience of Weibo on Huawei phones becomes much better. Our MAUs for Huawei phones increased 66% year-over-year and DAUs increased 134% year-over-year.

Another dimension of a partnership is to enable smart phone manufacturers to leverage Weibo as a CRM and marketing platform to directly engage with the customer to obtain customer insight and deliver targeted online marketing campaigns to increase their brand awareness and influence. As a result of our strategic collaboration, we note that the domestic smart phone brands have become top brands of Weibo. Our strategic cooperation with domestic smart phone manufacturers is becoming an integral part of your online marketing strategy which in turn will reinforce and solidify our relationship with them.

On our product fund, video is a top priority for us and we have continued to strengthen our investment in video. In Q2 we formed the partnership program and signed up many multi channel networks, aka MCNs, who represent video content creators to broaden the video offering on Weibo. We also made great technological progress in the area of video broadcasting experience and Weibo's recommendation engine for video feed resulting in strong video consumption. Daily video posts by creators on Weibo in June grew 38% sequentially. Daily video views in June grew 235% sequentially.

These milestone achievements taken together are driving the growth of video traffic in Weibo as well as help Weibo continue to grow overall MAUs and DAUs. Our video efforts are helping MCNs develop their business on Weibo. Take New Studio Media for example. In the second quarter video views of New Studio Media's videos on Weibo reached a total of 116 million up 628% quarter-over-quarter. In the second half we will focus on building out Weibo's ecosystem for content creation and consumption.

Turning to live video, live video is inherently natural to be on Weibo due to its anytime anywhere real time and multimedia nature. This is an important focus for us. The hottest category of live video posted by celebrities and internet influencers. We are partnered with Yixia Technology that enable their app Yi, which enables live broadcasting from any mobile device to share their broadcaster's content onto Weibo and allow Weibo fans to engage and talk to creators. By partnering with Yi we quickly entered the live video (inaudible).

In Q2 there were over 10 million live streams broadcasted on Yi 116 times higher than last quarter. In consideration of the complexity of live video technology and the variety of vertical contents we are forming strategic collaboration with top content providers for other categories of live video to build a unique live stream experience for both the broadcasters and their fans. For example, in the media category we are partnering with CCTV, 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 Taobao and HuMei. Our platform strategy allows Weibo to quickly enter the live video space in the second quarter. For example, CCTV used Weibo to broadcast 60 live sessions in Q2 which derived nearly five million views in aggregate.

As live video requires a higher threshold for content creation, our strategy is to position Weibo as a social media platform and work with third parties to enable their broadcasters to stream and build their fans base on Weibo. In addition to helping broadcasters build their social assets on Weibo to enable more (inaudible) development of their fan base, we hope to find a win/win monetization model with third party strategic partners.

Turning to content, we aim to build out a content ecosystem for video. On the one hand incentivize our users to share organic videos and at the same time work with content partners to offer a large volume of quality original content.

On our last call we shared our content strategy and discussed that we moved from growing content in general to becoming more vertical industry focused. We worked with key opinion leaders of each industry vertical to provide some with operational support, incentivize some to share more content and gradually extend our collaboration of the key organizations of each industry. We hope to develop a reinforcing cycle from accounts, content, monetization.

In Q2 we reached out to key organizations within the 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 festived that culminated into an awards night in June for KOLs in China. During the KOL festival these hashtags, #superkolfestival were viewed almost 10 billion times.

Superkolfestival allowed Weibo to solidify relationships with key south media organizations in the vertical industries from which we will collaborate in the area of content creation, fans development and monetization. In doing so, we hope to help these organizations learn to better leverage Weibo to expand their size and influence in their respective industries. We believe that our strategic cooperation will not only increase the number of KOLs and their engagement on Weibo, it will also increase Weibo's monetization potential in these industries.

Lastly, turning to monetization our strong ad revenue growth can be attributed to the strength of our SME business resulting from an increase in the number of SME customers as well as product upgrades such as our app download ad products which improved the ad effectiveness of Weibo's promoted ads. In Q2 the number of SME customers reached 906,000 up 104% year-over-year.

Our SME revenue grew 107% year-over-year. As Weibo's user base expands, our competiveness in attracting ad budget from fast moving consumer goods and (inaudible) 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.

In Q2 we upgraded Weibo's promoted video ad products and soft launched video ads to KA and SME customers. There were 81 KA and 3,460 SME customers who purchased video ads this quarter. Video ads have boosted Weibo's revenues in two ways. First, video ads help us expand our customer base.

For example, a number of television networks and online video platforms experimented with Weibo's video ads in Q2. This helped grow the number of large KA customers in Q2 by 45% from the prior year. Secondly, video ads help us get a bigger share of our customers' ad budget. As video consumption on Weibo expands and its 4G WiFi becomes more prevalent in China, we believe video advertising will be a major revenue driver for us.

In Q2 we also launched Deeplink which enables each portion of Weibo's matrix ad to embed a link to the app of the advertiser. Considering the explosive growth of the app market in China tapered off, we believe mobile apps will more and more rely on large existing active mobile user base to drive this traffic. As a leading source for mobile traffic and an online platform for content sharing, Weibo, through the use of Deeplink, a performance based app products can help non high frequency apps increase their user activeness.

We experimented Deeplink with HuMei in Q2 and test results show that by using Deeplink the cost per user activation decreased 21% compared to our previous app download products. Through Deeplink, non-high frequency apps can effectively utilize Weibo's content and ad format to acquire and re-activate users. With Deeplink we hope to gain a larger share of the ad budget from internet customers.

In Q2 we also launched lead ads targeting verticals with high ARPU and longer customer purchasing cycle such as the auto industry. As we improved user data analytics and ad measurements and enhanced ad targeting we are adding features such as (inaudible) forms to our advertising to support auto purchasers requiring longer decision making process. For example, Mercedes Benz ran a brand campaign for their C Class model where potential customers filled out a purchase intent form directly from Weibo's information flow.

To obtain more product information using Weibo's leads ads their cost per 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 hope to equip businesses 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.

With that, let me turn the call over to Herman for our financial update.

Thank you Gaofei and good morning everyone. Good evening to those of you in the West. Welcome to Weibo's Second Quarter 2016 Earnings Call. Let me give you the top level numbers. For the second quarter, Weibo's total revenues reached $146.9 million up 36% year-over-year or 44% on a constant currency basis exceeding 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 reached $127.2 million up 45% year-over-year or on a constant currency basis 53%. We continue to see strong adoption of Weibo's 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, with 67% on a constant currency basis. As online ads in China budget-shifts toward mobile, Weibo is well-positioned to benefit from this trend.

Turning to SMEs and KAs. Revenues from small and medium sized 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 of last year on a constant currency basis.

The strength of Weibo's advertising was led by our SME business which grew 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 download promoter fee (inaudible), as well as ad effectiveness improvement major promoter fees.

In the past SMEs primarily purchased performance ads. Earlier this year we enabled SMEs to also purchase branch advertising. The opening up of various ad 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 [YMP] Holdings Ltd, a cross-border e-commerce company, and Yogo.com, a B to C online store for fashion shoes, apparels and bags, are showing us that running a brand campaign, along with buying promoter ads, not only increases brand awareness but also boosts the return of their Weibo performance ads.

Another driver of our SME business is the continued momentum of Weibo's self-service, which enables individuals and busineses to perform online marketing with prepayments as small as RMB100, or $15. [Sands] marketing in China is growing rapidly, as many individuals and SMEs realize that they can perform social marketing on both PCs and mobile devices by opening a social account, without having to develop their own website, HTML5 site or mobile app. Sands marketing can be very effective because it allows one to market to his or her optimum fans 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 plan 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's social marketing, 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 was also a bright spot for us this quarter, as we launch a lead-ad product that allows auto advertisers to perform 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 and growing 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 games services was down 30%.

Membership fees, 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 costs and expenses. Total non-GAAP costs 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 costs and expenses was primarily due to an increase in bandwidth cost resulting from strong video consumption and overall growth in traffic, increase in marketing expenses and VAT associated with high 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 platform margin to continue to rise over the long-term, as Weibo's revenue scales.

Turning to balance sheet and cash flow items. As of 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 $24.1 million. Capital expenditure totaled $1.5 million and depreciation amortization expenses were $3.5 million.

Our Weibo shares floated in the market. According to our ADR depository forum, approximately 17% of Weibo's 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 foreign exchange rate fluctuations.

Before I turn the call over to the operator, let me quickly recap our call. We've continued to see momentum in 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 straight into our video offering, such as the virality of Weibo, our SIG recommendation engine which tags and recommends content based on user interest and social relationships, and our fans platform equipping creators and broadcaster with user traffic, engagement and monetization.

The unique propositions, coupled with our focus on our user experience in building up the ecosystem for video content creation and consumption, put us in a good position to become a top UGC video platform in China.

On the monetization side, we are introducing new products and ad technologies at incredible pace to increase ad effectiveness, such as deep link and lead ads. As we enter the second half of 2016, Weibo's 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 platform nature of Weibo, is translating into strong operating margin leverage. And as our revenue scales, we believe there's much room for Weibo's profit margin to further expand.

With that, let's now turn to Q&A. Operator, we're ready for questions.

Thank you, we will now being the question and answer session. (Operator Instructions). Our first question comes from Alicia Yap of Citigroup, please go ahead.

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 fees, versus display ads this quarter? And if you look into next year's, what will be the product monetization mix after the video revenues run out?

Hi Alicia, yes our advertising is broken up into three different type of advertising. One is a promoter fee, as you talked about, the other is display, and the other is topic that's associated with key words. So for the second quarter, our promoter ads was 53%, and our display ad is about a third of our revenue.

The other question you mentioned was in terms of videos. So we think that videos is really part of display ad. So I think going into next year, with regards to the mix of display and promoter, 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.

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

Yes, if you look at our expense trend lines and 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 revenue growth, and you're seeing that margin operating leverage.

So right now, going into second half of this year, we'll continue to see that operating leverage to continue, as our revenue continues to scale. So I think that if you look at us, I think the biggest differentiation as a social media is that our content is user generated. So that allows us, as the revenue grows -- you know, there's not much associated cost with it. So I think the bottom line is you should see our operating margin for this year and next year to continue to increase, as revenue increases.

Okay, great. Congratulations on a good result.

Thank you Alicia.

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

Hi management, thanks for taking my questions. 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 of increasing bandwidth cost. So can management give us some color, what is driving or offsetting the bandwidth cost increase in the quarter, thank you.

Good morning Claire. Yes, with regards to bandwidth cost, it's like this, you're seeing our video taking off very rapidly and you're seeing our traffic growing very rapidly. But at the same time, the operations side, our technology team has been very good at producing a lot of milestones to improve the delivery of 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 on bandwidth and we have made significant unit cost improvements vis-a-vis prior quarters.

So I think with this kind of strategy to first diversify our bandwidth purchase with third parties, especially working with Alibaba, [the Yuin Group] at the same time, and also with the technological advances, we're able to keep our bandwidth costs at bay while increasing our video and overall traffic.

Thanks. I have a follow-up question regarding your live broadcasting services. So I noticed that we launched the gifting functions for our live broadcasting services, starting from the early second quarter. So I'm wondering, currently is Weibo taking a cut out of the gross billing and how are we booking the revenue? Thanks.

Yes, so, hi Claire. Yes, so right now, as Gaofei talked earlier about live broadcasting, the primary partner that we have is working with Yi, right. And the way it works is that they generate the GMV on their platform and they're paying for the bandwidth and so forth.

With regards to us taking a revenue share, at this current stage we're not taking the revenue share from them. I think that what we're looking -- we're helping them -- you know enabling their broadcaster on Weibo to be very successful, that's usually number one, right.

As Gaofei mentioned, us paying as a platform first is to help their broadcasters set up accounts, to help them come up with really good content. Then really the third step is then talk about monetization. So as this whole business model builds out and a lot of broadcaster from Yi comes onto Weibo, we're enabling them to grow traffic and also enable our users to tip. And then we'll also then consider revenue share probably some time down the road. But for the second quarter we have not taken any revenue share from them.

Okay, that's very helpful, congratulations on the strong result.

Thank you.

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

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 ads, in terms of revenue contribution? How does the prices fluctuate on ROI with video ads compare with the regular [seed] ad. Secondly, what is the current revenue generation from the self-service system? Thank you.

Hi Juan, yes, good morning. Yes, we have not disclosed our video ads. I think our strategy this year for video ads is 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 this.

So you're not going to see it move the CPM at this point. But we envision, as there's more adoption for video ads, you'll see us probably pull back on a discount further down the road. With regards to our self-service ads, that's about a quarter of our SME advertising.

Thank you Herman.

Our next question comes from Evan Zhou of Credit Suisse, please go ahead.

Hi, good morning Gaofei, Herman, thanks for taking my question. Congrats on a very strong quarter. My question is regarding a portion of revenue is coming from maybe revenue sharing from some key opinion leaders. Could you quantify how much of that are coming from that type of ad format and what's our current set of accounting? Basically do we recognize growth on that? With the cost of revenue, how much of the revenue share that we actually book is within the cost?

The follow-up question, second on the potential business tax impact from the new ad regulations, could you maybe quantify a little bit of that. I guess that would be pretty minimal but some quantification would be helpful, thank you.

Good morning Evan. Your first question was how much revenue we're booking from our KOL. Is that correct?

Yes.

Yes, so, Evan, actually we don't have a specific number for KOLs. As you can see from our total advertisers, we have over 900,000 customers per quarter, we're not able to tag which one is KOL.

The way actually it 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 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 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 mid-tiers, and then you have kind of the grassroot who wants to be KOLs. So as a result of that, you're seeing our whole SME revenue grow. So it's really hard to say which specific part relates to KOL, but it's really that whole pyramid of trying to do your own personal branding on 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 through the channel as that kind of fans' marketing.

Okay.

And then with regards to the business that you talked about, my understanding is that in second quarter there's a new regulation that has a 3% VAT on search revenues. As you probably know, this will impact us very minimally as we have very, very little of revenue coming from search right now.

(Spoken in Mandarin).

Our understanding of the new tax regulation is that it basically does standardize a lot of the current policies.

(Spoken in Mandarin).

Yes, so the regulation, our understanding is that it focuses on advertising that are not very standard. Whereas for social advertising we believe, especially (technical difficulty) native ads, we think that this is something that's probably positive, based on the new government regulation policy track.

Okay, (spoken in Mandarin).

Thank you. Next.

Our next question comes from Wendy Huang from Macquarie, please go ahead.

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

Yes, we have.

Okay, and second question is also --

Because -- Wendy, the key issue is that when we generate revenue, all of our revenue are advertising revenue. Whereas for some of the search companies, their revenue is technology services. So historically they don't call themselves advertising revenue.

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

(Spoken in Mandarin).

Gaofei mentioned that I've spoken earlier that our entry into direct broadcasting is through our investment with Yi.

(Spoken in Mandarin).

So under our investment model, the investee, or the company that we invest in, will be generating the overall revenue and bear the cost associated with the revenue. Obviously we think that they will play under the condition of the market. And what we're seeing from our side is that we're seeing a lot of these broadcasters for live video want to be on Weibo, they want to increase their brand influence and also expand their fan base.

(Spoken in Mandarin).

The space for live video is very big and we also see it being very competitive. We're happy to see that us entering live video at a very fast pace, we're able to secure a lot of celebrities, a lot of the media accounts and a lot of the big KOL accounts. Through partnership with Yi, we hope to also be able to secure a good market share with regards to the grassroots doing kind of these live shows.

Thank you. My last question regards the brand advertising trends that you are seeing from the SMEs, and also I think you gave some great example about SMEs using your platform to do the campaign. So can you give some color on the typical spending by the SMEs on the brand advertising? Also do you expect your almost one million SME customer base to adopt this actually in the long term? Also if this is the case, how will the (inaudible) standing from the SME versus the KA to differ? Thank you.

Pardon me, presenter's line, are you still on the line?

Yes, we're still on the line.

Okay. Are you ready for your next question?

No, I haven't answered my question please.

Okay.

So to answer your question, under SMEs we have two types; we have the self-service and then we also have SMEs through channels, but the ones that are doing better advertising are the ones through the channels. So we actually see a good proportion of our SMEs through the channels that could do branding. We see that probably more at the larger small enterprises and also the medium sized enterprises. So I think we see a good segment of being able to do those.

I think at the end of the day SMEs in general are still trying to do performance ads, but we're seeing cases where when they make their brands better known, that when they do performance ads, you're seeing much more engagement as a result of people knowing the brands.

So I would just say that the SMEs through the channels there's a good segment of that has potential to be able to do brand advertising in addition to do just promoter fees.

Thanks Herman.

Okay.

Thank you.

Okay, next question.

Our next question comes from Alex Yao of JPMorgan. Please go ahead.

Hi, good morning everyone. Thank you taking my question and congratulations on a 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 a sales marketing cost. So I'm just wondering from a content perspective, what is the content that is driving the user growth, i.e. what are the content that most appeal to the new users?

(Interpreted) So you're seeing a lot of our growth coming from second, third and fourth tier cities, and the kind of content that's driving a lot of the new user growth, for example, like celebrities, you're 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 lot of traffic there.

So the way we have set up our self-media also allows us to go into other vertical content such as food, and we what we're able to do is allow a lot of these content providers to be able to set up accounts to generate -- fill the fan base and at the same time build their traffic and the monetize that we have allowed. So it allows them to create good content, create a fan base, increase your brand; at the same time be able to monetize from all the activities that they do.

So we think that the model that we have put in place in addition to celebrities and media we can actually expand this to other verticals.

So another part of our content is trying to aggregate more video relayed 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 a younger generation.

Okay Alex?

Yes, sure, thanks very much. Then I have a quick follow up on the video content strategy. So in your short video broadcasting vertical you have content that's generated and broadcasted by professional hubs such as CCTV, and then you also have content broadcasted by the KOLs or even the grassroots users. So I just want to understand how the user behaved differently on your video broadcasting vertical compares to (inaudible) such as such as YY and Inke. Would you be able to elaborate on what kind of content are seeing the biggest demand? Then maybe the metrics such as percentage usage between these two and anything related, that will be helpful. Thank you.

(Interpreted) We can see that YY in the traditional show stage form of live video is mostly coming from UGC and also from girls. So for Inke is very similar to YY's model except it's more mobile based. Well we have started entering into a live video is focus on our current stream, on celebrities, on media and also on KOLs and trying to get people from these various domains to be -- continue exclusively on Weibo.

So in the second quarter in addition to the key strategic domains that we have focused on, we also have allowed live videos or live broadcasting to our grassroot users who have verified accounts and what we're seeing is that those that are getting a lot of traffic are grassroot users and also big KOLs and we also see that there are people who are interested in media accounts but we're seeing that their ability to actually get tipping and monetization probably is not as strong as the other two that I mentioned.

So our strategy is to leverage media content and grassroots to increase coverage of live, get more people into watching live and then to leverage KOLs to be able to monetize better from this segment.

Okay, thank you very much, Alex.

Thank you.

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

This concludes our call for today. Thank you everyone.

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