Weibo Corp (WB) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Weibo Reports Second Quarter Financial Results Conference Call.

(Operator Instructions) I must advise that this conference is being recorded today, Wednesday, August 9, 2017.

I'd like to hand the conference over to your first speaker today, (inaudible).

Thank you, please go ahead.

Thank you, operator.

Welcome to Weibo's 2017 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 also 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, 2016 filed with the SEC on April 27 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 that are non-recurring in nature or that will 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'd like to turn the call over to our Chief Executive Officer, Gaofei Wang.

(foreign language) Thank you.

Hello everyone and welcome to Weibo's second quarter 2017 earnings call.

(foreign language) On today's call, I will share with you highlights in Weibo's user growth, product and monetization as well as an update on our key initiatives in 2017.

(foreign language) Let me first discuss our second quarter financial results.

We continue to see strong revenue and user growth this quarter.

Our total revenue in the second quarter reached $253.4 million, up 72% year-over-year.

Advertising and marketing reached $218.3 million, up 72% year-over-year, an acceleration from 45% year-over-year ad revenue growth in Q2 2016.

73% of our ad revenue in Q2 came from mobile.

Non-GAAP net income in the second quarter was $86.7 million, up 144% year-over-year.

(foreign language) On the user front, Weibo's monthly active users reached 361 million in June, up 28% year-over-year.

Average daily active users in June reached 159 million, up 26% year-over-year.

In June, 92% of Weibo's MAUs were mobile.

(foreign Lanugage] Last quarter, due to various promotional events in Weibo such as the red envelope giveaway around the Lunar New Year, we experienced significant user growth and user engagement.

In the second quarter, we continued our efforts in user acquisition of replacing our core focus -- on increasing user retention and laying out the separation work to support future monetization.

At the end of Q2, we can see the impact of our marketing campaigns to acquire new users bearing fruit.

Due to the combined efforts of our sales team and ad product optimization from our development team as well as the continued increase in Weibo's influence, we saw the ad budgets from our customers continue to increase, both the number of ad customers and our ad revenue have grown meaningfully.

And most notably, the number of pay customers and [K] ad revenues (technical difficulty) as Weibo's platform network set continues to strengthen, this effectively enhances our operational efficiency, monetization and help us maintain a leading position in the mobile Internet.

(foreign language) As part of the second quarter operational update, I will cover our progress in the area of user, content and customer.

(foreign language) First on our user growth, on our last quarter's call, we discussed how we would deepen our strategic cooperation with Weibo partners such as smartphone manufacturers, television programs, and top ad partners.

This quarter, let me share with you the results of our cooperation with smartphone manufacturers and television program producers.

(foreign language) By deepening the strategic cooperation with our key domestic smartphone manufacturers, whose market shares are rising, Weibo has maintained strong mobile users growth.

In June, our mobile MAUs from domestic smartphones grew [74%] year-over-year.

Since the second half of last year, we have increased the pace and breadth of our strategic cooperation with smartphones -- domestic smartphone manufacturers.

At the product level, we work with these partners to improve Weibo's user experience and allow greater reach of our product.

For example, we have customized the Weibo app, optimized its performance running on domestic smartphones such as decreasing storage size, estimating power consumption and speeding up the response time.

In Q2, usage from top domestic smartphone manufacturers such as OPPO, Huawei and Vivo have grown significantly.

For example, MAUs using OPPO has increased 130% year-over-year while MAUs using Huawei have increased 90% year-over-year.

Smartphone makers leverage Weibo as a social CRM and social marketing platform to directly reach and engage with their end user, stay connected with their audience and increase awareness of their brands.

This value proposition gradually moves Weibo into an indispensable position in the smartphone ecosystem.

(foreign Language] Turning to TV network and online video site cooperation, Weibo's coverage of this audience and user acquisition through this channel is increasing.

More and more TV variety shows, TV dramas, online series and sports programs are choosing Weibo as the preferred social platform to distribute their IP content and engage with their fans.

Through our cooperation, TV networks and online video sites are gaining more traffic and monetization potential from Weibo's ecosystem [while] Weibo which gives great brand exposure and user growth.

For example, we have formed content partnerships with 7 top TV stations including CCTV and [Zhejiang] satellite television and with 5 online video sites including Youku, iQiyi and Tencent Video, closely working with them to distribute many television variety shows and TV dramas on Weibo.

In June, video views on television variety shows on Weibo increased 381% year-over-year and video views on TV dramas increased 490% year-over-year.

Our partnership with Zhejiang satellite television during their top show (technical difficulty) running to jointly promote Weibo Stories, a newly launched feature in Weibo has spurred the growth of our users.

In the area of sports, our partnership with the NBA has shown meaningful results.

Short videos of the NBA match during the past game season were viewed 8.4 billion times.

In video views, the last game of the NBA final had surpassed over 100 million.

NBA official accounts together have amassed 60 million followers on Weibo.

Going forward, we plan to expand our partnership with video content producers especially in the area of TV and sports programs assisting premium content to effectively leverage social media and acquire a bigger audience and greater user interaction.

(foreign language) On the user product front, we are employing machine learning to increase user engagement on relationship-based information feeds and expand the usage of interest-based information feeds with the aim to improve content discovery, consumption and user time spent.

In June, both the number of users who refreshed interest-based information feeds and interest-based information feeds that were refreshed increased double digits year-over-year [freeing more ad inventories].

In the second half this year, we plan to improve the algorithm of Weibo's interest-based information feeds to allow users more timely -- receive breaking news and content that will interest them.

As we juxtapose relationship-based information feeds with interest-based information feeds, we believe such strategy will create synergy and strengthen Weibo's leading position in content creation, consumption and engagement in the social media space.

(foreign language) On the multimedia front, both video views and content creation have continued to grow rapidly.

In June, daily video views grew 159% year-over-year and [90%] quarter-over-quarter mainly from 2 drivers.

(foreign language) One, on video content creation, with our focus to expand content verticalization and increasing the number of top content creators partnering with MCNs to create content, we are seeing the breadth and volume of video content on Weibo expanding.

In June, the number of videos shared by top content creators increased over 100% year-over-year.

In the second quarter, Weibo also launched a video creation platform that equips news media and video MCNs with efficient video editing tools that gives them access to a real library to facilitate content creation.

This significantly simplifies the [sport] video creation process and enhances the full video production capabilities.

So far, we have granted more than a 100 organizations access to our video creation platform including 7 top TV channels such as [Zhangzhou satellite television and Zhejiang satellite television].

Going forward, we plan to further expand our cooperation with key partners to enrich the video offering on our platform.

(foreign language) Two, in the area of video consumption, we have increased the investment in machine learning to improve our ability to recommend more relevant video content to optimize the construction of our users' social interest graphs for video.

This has increased consumption of recommended video timelines.

In June, video views on recommended video timelines increased nearly fourfold year-over-year.

(foreign language) As mentioned on the last call, we are focused on increasing our investments to enable our users to share more videos and increase user engagement.

For example, Weibo Stories which went into beta in April is seeing good traction.

Currently, 10% of Weibo MAUs are using Weibo Stories.

Daily stories shared as well as user consumption and engagement with Weibo Stories is growing meaningfully.

This simple video product with strong social nature will help our users to better share their daily life and interact with their relationships on Weibo.

(foreign language) On live broadcasting, we've [seen] live broadcasting steadily growing, we plan to begin revenue share with them in the second half, which was based on the [tipping revenue generator on both Yi] and Weibo's platform.

We believe such revenue sharing model will allow our investment to have a sustainable return.

We are currently working on improving the technical aspect of our live broadcasting within Weibo and thus we expect live broadcasting revenue to be a very small portion of Weibo's total revenue in the third quarter.

(foreign language) Next on content, we have formed strategic cooperation with over 500 MCNs spanning across 45 content verticals, which we believe will significantly lift Weibo's content ecosystem.

In June, [videos] of top content creators increased 55% year-over-year.

In addition, 23 content verticals have surpassed monthly views of 10 billion, new additions such as travel, photography and gaming will further expand Weibo's reach its brand influence in the market.

In June, we held the second annual super key opinion leader conference in China, MCNs from 10 verticals, including recent additions in food, gaming, [anime, parenting] participated in Weibo's online campaign bringing up to the KOL Awards Night, which generated over 10 billion views [and keys] related to the event.

We are focused on helping our content partners become more successful.

For example, supporting MCNs for new verticals to better leveraged Weibo to increase their influence and competitiveness.

We believe that our partnerships with MCNs will not only increase the number of content creators and engagement on Weibo, but also increased the monetization potential of our partners in those sectors [and industries].

(foreign language) Turning to monetization, in the second quarter our KA ad revenue continues to grow rapidly, up 81% year-over-year.

As we discussed previously, brand advertisers are beginning to recognize the value of Weibo's social marketing and consequently we are deepening our cooperation and becoming long-term marketing partners with our brand advertisers.

As customers learn of our successful case studies of Weibo social marketing, more and more brand advertisers [are led to like] Weibo's new content and strong social metrics along with our brand campaign and attract strong user engagement.

For example, during the broadcasting of TV drama Ode to Joy 2, 9 KA customers carry out related marketing campaigns on Weibo, [utilities] and FMCG companies such clear leverage, the Ode to Joy 2 shows in their ad campaign and saw its brand [title show] topic receive over 6.9 billion views during the marketing campaign.

As another example, Fendi, a luxury brand leveraged their influence of (inaudible) to raise brand awareness with (inaudible).

According to AdMaster, Fendi's campaign [121 %] increase in brand satisfaction and 119% increase in purchase intent.

As Weibo becomes more popular for breaking news and celebrity, our value proposition to brand advertisers will further increase.

(foreign language) Turning to SMEs, revenue from SMEs in the second quarter grew 78% year-over-year.

We are seeing O2O customers and game developers experiencing faster growth.

As mentioned last quarter, O2O customers have a better understanding of social marketing and have continued to increase their spending on Weibo that has served these customers to optimize their ad products and keep their marketing effective.

For example in Q2, we enabled advertisers to target users in the proximity of [gaming centers] in major cities around China.

Such targeting [and ad spend]

helped satisfy our SME's local market needs and improved users' social marketing experience.

Going forward, they kind of further optimize Weibo's user data to improve the targeting capability to build on the positive application of Weibo's performance in ads in the market.

(foreign language) Moving on to video ad, our current focus is to improve advertiser with video ads.

In Q2, video ad customers grew at double digits from last quarter and the proportion of video ad revenue as percentage of total ad revenue [fell] slightly from last quarter, since the beginning of the year, our product team has been focused on creating a standardized learning [KA] solution for video ads.

We believe Weibo's new learning KA solution for video ads provide a better user experience and enable more supply of marketing content, improve sales conversion and attract ad customers from more industries to experiment Weibo's video ad.

(foreign language) Lastly, for the past few years, as Weibo's monetization developed, we have been gradually releasing ad products at different [launch times], which does not optimize Weibo's traffic.

We been working on a new ad system that will better utilize Weibo [traffic] more, enabling better targeting, more efficient real-time bidding and more comprehensive ad measurement.

We're currently beta testing on our new ad system at (inaudible) go live in the coming months.

We will further update you as these developments arise.

(foreign language) With that, let me turn the call over to Herman for a financial update.

Thank you, Gaofei.

Welcome to Weibo's second quarter 2017 earnings call, At the end of June, I traveled to Anaheim, California along with several other Weibo members to attend VidCon, a multi-genre online video conference, the largest of its kind with presenters from social media like YouTube, Instagram, Snapchat, Musical.ly as well as other industry representatives.

It is interesting to note that VidCon is in its 8th anniversary and the online video industry is only getting bigger and more popular.

Millennials and Generation Z are going up in the mobile environment with direct engagement with Internet endpoint [service] and public sharing of their daily life, a part of their lifestyle and culture.

We are seeing similar trends in China, robust growth of online video consumption on mobile, social accounts becoming an important content distribution channel and users publicly sharing their lives on social platforms.

As a leading social media in China, we are benefiting from the conversions of mobile, social and video trends.

Weibo allows users to be more social and interactive, creators to quickly build a fan page and monetize, advertisers to take advantage of the [variety] and vibrancy of Weibo's community.

We believe it is against this backdrop that Weibo's traffic, revenue and profitability continue to see strong growth.

Let me now go through our financial highlights.

For the second quarter of 2017, Weibo's total revenue reached $253.4 million, up 72% year-over-year, exceeding the company's guidance between $240 million and $250 million.

Non-GAAP net income attributable to Weibo was $86.7 million, up 144% year-over-year.

Non-GAAP diluted EPS was $0.38 compared to $0.18 a year ago.

Our adjusted EBITDA reached $103.1 million, up 166% year-over-year and adjusted EBITDA margin reaching 41% in the second quarter compared to 26% last year, the 15 point lift in EBITDA margin from last year once again demonstrates the strong operating leverage of Weibo's platform and the competitive edge of Weibo's unique content ecosystem.

Turning to ad revenues, advertising and marketing revenue for the second quarter reached $218.3 million, up 72% year-over-year.

Mobile ad revenue was $159.5 million, up 85% year-over-year and made up of 73% of our total ad revenue.

With 92% of our MAU is mobile, Weibo is benefiting from ad budgets shifting to mobile.

As Gaofei mentioned, we improved Weibo's targeting this quarter by enabling advertisers to select users within the proximity of business centers in cities across China.

We believe features such as this will help local merchants more effectively target their customers nearby.

Total advertisers in the second quarter reached 880,000, down 3% year-over-year and up 13% quarter-over-quarter.

Self-service ads, which contributed to the year-over-year decline in the total number of ad customers, has seen its customers grow sequentially in the last 2 quarters.

Moving on to SMEs, in the second quarter, Weibo's SME ad business was $125 million, up 78% year-over-year.

Both SMEs through the channel and self-service saw continued strong revenue growth year-over-year.

On Weibo, individuals and small merchants can perform social marketing from the convenience of their smartphones starting with a very small budget.

Once their monthly spending becomes sizeable, they have the option to go to third-party ad agencies who offer service and support, credit and volume discounts.

Top categories of our SME business through the channel include app developers, e-commerce and O2O companies.

SMEs for the most part purchase performance based ads.

This quarter we enabled our advertisers to target current WiFi users.

This feature is very popular especially for app developers as such social marketing can go from branding to interest generation to app download all in one marketing step.

Moving on to KAs, our key account business made up of mostly of large brand advertisers is the second engine of Weibo's strong growth.

In the second quarter, our KA ad revenue reached $80.2 million, up 81% year-over-year.

The number of KA customers this quarter grew 76% year-over-year, which illustrates the continued adoption of social marketing in China.

Social marketing on Weibo is unique.

As Gaofei had pointed out, the [Eli] example shows a brand customer leveraging trended topic on Weibo, in this case a TV drama, while the FENDI case shows how an ad customer can leverage KOL to amplify the reach of its social campaign.

Weibo has an advantage in social marketing because of its large user base, it's open sharing and viral nature.

Revenue from Alibaba was $13.2 million, up 3% year-over-year and up 69% quarter-over-quarter.

As we pointed out last quarter, the value that Weibo derives from the partnership is not only [ad spinning] from Alibaba, but also revenue that we can derive from Alibaba's ecosystem.

Moving on to other revenues, Weibo's other revenues reached $35 million in the second quarter, up 78% year-over-year.

Game services is still on the decline year-over-year, but now makes up less than [1/5] of our total other revenues.

The declining proportion of game services is helping margin improvement, as well as dampening the offset of revenue growth.

Membership fees, which include individual memberships and enterprise account verification was up 110% year-over-year while data licensing was up 101% year-over-year.

Other revenues is becoming the third engine of Weibo's growth and a key driver for the growth as the fact that over 70 million Weibo accounts have activated Weibo Wallet.

Turning to cost and expenses, total non-GAAP costs and expenses were $153.3 million, up 37% year-over-year primarily due to increases in marketing expenses, turnover taxes and development expenses.

During the quarter, sales and marketing expenses grew at a faster pace year-over-year, which can be attributed to the higher commissions for the overachievement of revenues, increased channel marketing spending as well as increased expenses for brand events to promote KOL, and movie star community on Weibo and for brand promotion of newly launched Weibo Stories.

Non-GAAP operating income for the first time surpassed $100 million a quarter, reaching $100.1 million in the second quarter, up 188% year-over-year.

Non-GAAP operating margin in the second quarter reached 39% compared to 24% in the same period last year.

Income tax expense was $16.4 million compared to $1.8 million last year primarily due to higher profitability and the change in tax status of our PRC subsidiary from being fully tax exempt last year to 12.5% this year.

Non-GAAP net income attributed to Weibo in second quarter is $86.7 million, up 144% year-over-year.

Turning to balance sheet and cash flow statement, as of June 30, 2017, Weibo's cash, cash equivalents and short-term investments totaled $609.2 million.

Cash provided by operating activities for the second quarter is $157.2 million.

Capital expenditures totaled $2.5 million and depreciation and amortization expenses amounted to $3.5 million.

On shares in the market, per ADR depository firm as of July 10 post a dividend distribution of Weibo's shares by SINA, approximately 27% of Weibo's outstanding were represented by American depositary shares.

Turning to Weibo's third quarter guidance, we estimate our third quarter revenue to be between $290 million and $300 million, which assumes a point change rate of CNY 6.75 to $1.

Using the midpoint of range, the year-over-year growth of our Q3 revenue forecast would be 67%, which is quite robust considering last year had the benefit of the Olympics.

Turning to June 22 Chinese government notice, on June 22, a notice was made public by the State Administration of Press, Publication, Radio, Film and Television or SAPPFRT in short that suspends several companies' video and audio program services due to their lacking Internet, audio, video program transmission license and posting on their sites of certain commentary programs with content that the SAPPFRT believed to have violated government regulations and Weibo is named as one of these companies.

We have been working closely with the relevant government authorities to take corrective measures and have received a fine from the authorities on this matter.

Impact from the notice has been limited to our overall video operation.

We will continue to work closely with SAPPFRT on an ongoing basis to improve the management and operation of our audio and video business.

Since Weibo is not a wholly state-owned or a state-controlled company and we were not operating prior to January 31, 2008, we are not qualified to obtain the Internet, audio, video program transmission license under the current legal regime although we plan to apply for such license when feasible to do so.

For more Information on this matter, please refer to the risk factor, we may be adversely affected by the complexity, uncertainty and changes in the PRC licensing and regulation of the Internet businesses and other related areas in our 2016 annual report 20-F.

Apart from the above, we will not be able to speak further on this topic beyond our prepared remarks.

Before I turn over to the operator, let me quickly recap our Q2 results.

Our execution in the quarter again has been solid.

Weibo's traffic remains robust with an addition of 79 million MAUs and 33 million average DAUs in the month of June from the same period last year.

Total revenues grew 72% year-over-year in the second quarter, which is an acceleration from Q1and adjusted EBITDA margin reached an impressive 41%, up 15 points from last year.

Weibo's strong profit margin is contributed by 2 key factors: we have formed strategic cooperation with key domestic smartphone manufacturers and enabled them to leverage Weibo as a CRM and social marketing platform, which in turn help us more effectively penetrate lower-tier cities; our unique content ecosystem enables content creators to build a fan base on Weibo and monetize from their social assets, which saves Weibo content cost.

When these content monetization means mature, it may present Weibo opportunities for revenue share.

For example, video broadcaster who monetize [to virtual gifts were tipping] on Weibo.

In the area of premium video content, we continue to expand Weibo's large content pool by working with IP organizations like TV stations, sports organizations, and online video sites as well as the MCNs.

In addition, we roll out Weibo Stories to encourage UGC videos as well as offer a video editing platform and video library to more than 100 professional organizations to make it easier and faster for them to create short videos.

Consumption of videos continue to grow at 159% year-over-year and our video view number this quarter completes the lapping of autoplay.

On the monetization side, our strong revenue growth is powered by 3 engines of growth: SMEs, KAs, and other revenues whose growth ranges from 78% to 81% year-over-year.

On a currency neutral basis, would have been 7% to 8% higher.

We continue to innovate on Weibo's ad offering by improving our targeting capabilities such as to WiFi users only or users nearby a business center.

By adding new ad formats such as video formats in various forms, by introducing new features such as adding a landing page to video ads to allow user to take action while watching the ad, for example, downloading an app.

Lastly, but not least, we're beta testing our new ad system which we hope to go live soon to further increase the effectiveness of Weibo's social marketing.

We are quite excited about the progress that we have made this year.

With that, let me now turn to the operator.

Thank you.

(Operator Instructions) Your first question comes from the line of Alicia Yap of Citigroup.

I ask the English first.

I have questions related to overall ad revenue.

Can you share with us the revenue contribution coming from the global international brands versus the domestic brands?

And related to that based on the existing ad customer profile, which industry vertical or category that's currently still have a small budget -- ad budget in the social platform that you believe you have opportunity to further penetrate into?

(foreign language).

Hi Alicia, I'm going to take the first one and then Gaofei will take the second one.

We actually don't look at our advertiser between global or domestic because a lot of the major brands or biggest industry or FMCG or from the IT industry and auto and a lot of the major brands -- international brands are already making the decision domestically.

So I would say, the majority of the buying are making the decisions domestically, but they're not necessarily all domestic companies.

(foreign language) So we started a social marketing -- we started working with industries and seeing some industries growing pretty fast.

For example, the year before last year, we started doing -- selling our social ads to the auto industry and we're seeing growing the growth over 100% year-over-year.

(foreign language) So when we normally enter a vertical, we first focus on generating good content.

So when we have content example -- readership of over 10 billion per month and where we start to look at monetization.

And if you look at recently, we've entered markets such as real estate, such as travels, such as game and we've seen a very strong growth particularly from the game industry.

So we focused on trying to draw a lot of these large influencers, self-media related to the industry, get them to generate a lot of great content, grow the traffic and then at that point, it would be easier to monetize.

(foreign language) So there are certain industries when we enter, it's faster to develop and certain industries take longer time.

For example, game seem to have a faster ramp up whereas real estate, while we've started entering this industry, it might take us 1 or 2 years to grow that into a significant scale.

Next question comes from the line of Fan Liu of Goldman Sachs.

Can I ask what's your revenue contribution from the mobile and also video ads this quarter?

And also would you mind to share with us the revenue breakdown between display ads, promoted feeds and other formats?

Thank you.

Let me translate in Chinese.

(foreign language).

This is Herman.

I'll take your questions.

So with regards to mobile, as I said in my prepared remarks, its about 73% of our total advertising.

With regards to revenue coming from video format, this quarter is just slightly a little bit more than last quarter.

Last quarter, we said it was about 18%.

This quarter its probably between 18% to 20%, somewhere along that line.

And then lastly, with regards to revenue breakdown by product, obviously, the largest component of our ad product is coming from [commodities].

This quarter is about 51% of our total ads.

Historically, display is our second category and that's about 34% and then the rest mostly will be coming from topics and there will be other types of inventory.

Next question comes from the line of Juan Lin of 86Research.

Congratulations on a very strong quarter.

My question is related to your user growth.

So over the last 4 quarters, we have added 80 million MAU.

I'm wondering whether we expect growth of MAU to accelerate going forward just like what we have seen over the past 3 years or whether we expect the net add to stabilize at the current level and what are the future strategy for user growth going forward?

And the second question is related to sales and marketing expenses.

It's actually added [12 million] sequentially, which is the highest sequential increase ever.

I'm wondering if management can help us to breakdown the sales and marketing expenses by channels and whether we expect the sales and marketing expenses to continue growing at a similar level going forward?

(foreign language).

(foreign language) So this year, we believe our new user growth will mainly came from Tier 3 and Tier 4 cities and primarily Tier 3 cities because that's where we focus on most with our channel efforts.

(foreign language) So our channels, we've focused in several areas: number one is we mainly focus with smartphone manufacturers and also with television stations.

So the main driver is coming from a channel perspective and then in terms of trying to encourage new users to come on with products, we focus on short videos because the video market is growing very rapidly in China.

(foreign language) So we focus on our user growth mainly coming from third and fourth tier cities.

With regards to third tier cities, we've probably have grown to -- penetration rate growth equivalent to 30% of Tier 2 cities and then with regards to Tier 4 cities, our penetration rate is still very low.

So we think that there is still great opportunities coming from Tier 3 and Tier 4 cities.

(foreign language) Yes, so as we further optimize Weibo and improve our future set and also add more content -- attracting more content, we're seeing that we're able to also get all users to actually come back and reactivate them and have them continue to use Weibo.

When you look at how the volume of users this quarter compared to last year same period, the amount of users that we can get to reactivate basically doubled compared to the same period last year.

Okay and then, the second question is on sales and marketing spending.

So, yes, as you can see our sales and marketing spending in the second quarter was bigger.

I think I mentioned most of this increase is related to channel spending.

So in the past as you guys probably know, we embed Weibo apps in smartphones.

This quarter we also started doing some branding, working with [Appsource] of various smartphones.

We don't break up the actual spending by these channels because we think that this is pretty sensitive data.

As you know, there are many content apps that's competing in this space.

So I think this is sensitive, but to answer your question, there's more marketing spending this quarter.

Most of it is coming from channel.

There are some other ones as we talked about from events, from pushing stories, branding and so forth.

And going forward, we think that some of the marketing as a percentage of revenue was probably not going to grow too significantly, but we think that we're going to have to continue to spend more for sales and marketing if we see -- if we can spend it effectively and be able to acquire new users.

Next question comes from the line of Alex Yao.

I have 2. (foreign language) So I have 2 questions.

When we visit KOL event you guys hosted in the summer, we find that one of the key strategy for KOL operation is MNC institutionalization.

Can you talk about how should we think about the implication to the platform in terms of user growth, engagement, monetization et cetera?

The second question is about the interaction and engagement of the user base.

You guys have been reporting pretty robust MAU growth in the past few quarters.

At the same time, you've been adding more rich media features such as a variety show, sports et cetera, et cetera to the platform.

Can you share with us the impact on user interaction and engagement?

It would be great to talk about the trends in terms of time span, video frequency, retention ratio et cetera, et cetera.

Thank you guys, I stop here.

(foreign language) So let me first answer why we trying to institutionalize the KOL industry.

So the way we're thinking about this not only when influencers come on to Weibo, we're helping them to grow their traffic, we're looking at how to allow them to monetize better and also increase their influence of each of these accounts.

So we think that by helping them joining a corporation that they will be able to do these objectives more effectively.

(foreign language) So from an operational efficiency perspective, if we can support MCNs rather than supporting these key opinion leaders directly, you can see tremendous amount of leverage.

In the past, maybe having 10 employees we can support 100 KOLs, but once you now work with the MCNs, then our operating efficiency can be very leverageable.

(foreign language) So with regards to [enthusiasm] to produce great content it will be much easier to work with MCNs to support these KOLs, so that we have consistent high quality content.

At the same time, having them be very sticky on platform to continuously create the content.

(foreign language) So when we look at social platforms in the West, we noticed very similar models.

For example, YouTube, when you look at YouTube, they also work with MCNs in order to manage a lot of their KOLs.

And what happened is it improves their management, improves their operations and ultimately the content quality will be better and there's much stability in terms of continuously working with KOLs.

(foreign language) So when you look at content coming -- the top contents, premium contents that have IP coming from us (inaudible) and so forth, we notice is that these contents usually have higher quality.

So you're seeing more engagement and you're seeing much more viewership of this premium content compared to the Weibo video content.

Next question comes from the line of Gregory Zhao.

(foreign language) Can you share some recent progress and metrics of like Weibo Stories and also the users -- captions of the user engagement interest-based feed?

And you also mentioned the new advertising system, the beta testing version, can you share with us a channel for your key advertising metrics?

And how the improvements the new system can bring to our CPM, CPC upload and clickthrough rate?

(foreign language) So let me take the question with regards to interest-based feed.

So interest-based feed went live sometimes last year.

And we started focusing on interest-based feed because originally we just had this authority based on relationships.

And what interest feed does is it allows the reader of interest-based information feed to be able to acquire more traffic, because they are not just accounts that the user follow up, but also encompasses the content that's pushed by the Weibo platform.

So we're able to push them and have the users consume more variety of content.

We think that we have an opportunity to actually be able to compete in the market against other interest-based apps, because we can leverage the large breadth of content that we have, and also the larger user scale that we have.

So you asked for some metrics, let me give you.

I think in terms of the users who can use interest-based feed and in terms of the view refresh, it probably doubled from last year.

(foreign language) So with regards to our stories, at the end of Q2, we did not fully launch.

There's still a lot of users, for example, users in same portions of [android] that the product has now.

So we are really in beta.

But let me explain our position for this product.

The whole idea is that by offering such product life stories, it should be easier for individuals and for celebrities to actually be able to share the video content.

It has -- for professional organizations, they already have very robust video content production system but for individuals we think there's something like stories where they can just kind of casually share the thought that they could easily just share at Weibo using a product like this.

(foreign language) So with regards to engagement, where we are seeing that users who use stories are getting more engagements than, for example, using short videos and sharing the short videos to their timelines.

So our purpose is to allow to there to be more engagements with video.

So we think that some products like stories would help meet that objective.

And then with regards to the metrics on stories, we currently have MAU, 10% of [MAU], so over 36 million users are using stories, even though it was not fully launched.

It's still in kind of the beta mode.

And we believe that with our product, with the kind of social usage right now with our brand promotion and so forth in the second half of this year, we should these numbers continue to rise.

Thank you.

That concludes our Q&A session.

There's one other piece, the question was on our ad system, how it would impact -- how would our advertising be impacted as we launch our ad system?

(foreign language) So, we said that we expect to have this product go live by the end of third quarter.

One of the reasons we want to have a new ad system is because over the last few years, as we launched our ad products, our products have been undergoing live on a piecemeal basis.

So if there is a fully optimized ad we have, so once we launch a system, we believe that we can probably be able to monetize better with our existing [ad].

(foreign language) Our goal is to have ultimately all of our customers be able to pay from one system, as we mentioned earlier.

Currently, when customers buy, they buy from multiple different ad systems, and it's not the most efficient, so we are able to consolidate all of our ad product into one system, and with that we should be able to optimize on our ECPM and also be able to create more engagement with advertising, and we tested this product in Q2, and we expect it to go live by the end of Q3, and we believe that it's probably going to take us some time to be able to treat the system afterwards, but ultimately we think we are going to make sure that we should be able to do better with the ECPM and also with the engagement of our ads.

Thank you that concludes our Q&A session.

Now I would like to hand the conference back to our presenters.

That concludes today's conference call, thank you for joining us everyone.

Thank you, ladies and gentlemen, this does conclude the conference for today.

Thank you for participating.

You may now all disconnect.