Weibo Corp (WB) 2019 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Weibo Reports Second Quarter Financial Results Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

I would like to hand the conference over to your speaker today, Ms. Sandra Zhang.

Thank you.

Please go ahead.

Thank you, operator.

Welcome to Weibo's Second Quarter 2019 Earnings Conference Call.

During today, our Chairman of the Board, Charles Chao; our CEO, Gaofei Wang; Our SINA Group CFO, Bonnie Zhang; and our VP Finance and Interim CFO, Fei Cao.

The conference call is also being broadcast on the Internet and is available through Weibo's IR website.

Before the management remarks, I would like to read to you the safe harbor statement in connection with today's conference call.

During today's call, we may make forward-looking statements, statements that are not historical facts, including statements of our beliefs and expectations.

Forward-looking statements involve inherent risks and uncertainties.

A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements.

Weibo assume 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 20-F and other filings with the SEC.

All the information provided in this press release is occurring as of the date hereof.

Weibo assumes no obligation to update such information, except as required under applicable law.

Additionally, I'd like to remind you that our discussion today includes certain non-GAAP measures, which include stock-based compensation and certain other expenses.

We use non-GAAP financial measures to gain a better understanding of Weibo's comparative operating performance and the future prospects.

Our non-GAAP financial excludes certain expenses, gains or losses and other items that are not expected to result in future cash payments or are nonrecurring in nature will not be indicative of our core operating results and outlook.

Please refer to our press release for more information about our non-GAAP measures.

Following management's prepared remarks, we'll open the lines for a brief Q&A session.

With this, I would like to turn the call over to our CEO, Gaofei Wang.

[Interpreted] Thank you.

Hello, everyone, and welcome to Weibo's Second Quarter 2019 Earnings Conference Call.

On today's call, I'll share with you highlights in Weibo's user growth, product and monetization as well as progress we've made on our key initiatives in 2019.

Let me start with our second quarter financial results.

We are delighted to see solid growth in revenues and user base.

Our total revenue reached $431.8 million, up 1% year-over-year or up 7% on a constant currency basis.

Advertising and marketing revenue reached $370.7 million, flat year-over-year, or an increase of 6% on a constant currency basis.

86% of our ad revenue comes from mobile.

Non-GAAP net income during the second quarter was $156.4 million, representing a non-GAAP net margin of 36%.

On the user front, in June 2019, Weibo's MAU reached $486 million, up 13% year-over-year, representing a net addition of 55 million users year-over-year or 21 million users quarter-over-quarter.

Average DAUs reached 211 million, up 11% year-over-year with a sequential acceleration from prior quarter.

In June, 94% of Weibo's MAU come from mobile.

In the second quarter, on top of user growth, we progressively focus on improving user retention and engagement, as it is particularly important for us to strengthen our competitive edge amid a deceleration of the growth in overall China mobile Internet population.

Leveraging an optimized platform mechanisms in facilitating social interaction and improving content distribution capability, we are encouraged to see enhanced efficiency in content distribution, which help to grow our user scale, and more importantly led to a double-digit growth in feed refreshments, impressions and user interactions on a year-over-year basis.

On monetization front, KA business continued to grow nicely during this quarter, benefiting from the increasing adoption of social ads within client's ad budget.

It's also attributable to the sales team's advanced know-how in addressing customer demand and capturing market opportunities.

SME business achieved double-digit growth quarter-over-quarter as our initiative to refine ad products and optimize sales channel have taken effect despite near-term market challenges still exist.

In discussing our operating update of the second quarter, I'll cover the areas of users, content and customer of Weibo.

Let's start from user growth and engagement.

In the second quarter, Weibo's net addition of MAUs and DAUs on a quarterly basis were the highest level among the past 4 quarters.

And user engagement, feed refreshment and impressions all delivered robust growth, exceeding our expectation.

The enhanced user growth and engagement in the second quarter were mainly attributable to 3 key areas of progress we made.

First, we expanded our channel coverage and enhanced user acquisition efficiency through optimize channel investment strategy.

Second, the frequency of content consumption per user and interactions has been elevated by a large degree through improvement of content consumption efficiency and optimization of social-related functionalities.

Third, we executed well in the new user acquisition and recall of dormant users, leveraging our strengthened platform nature around the hot events and discussion.

Let me provide more color on these initiatives.

First, from the channel perspective, we have made good progress in our partnership with handset manufacturers and top apps.

Benefiting from deepened collaboration with partner in the content area, MAUs from domestic handset continue to grow double digit year-over-year.

Meanwhile, the cooperation with top app have allowed Weibo content accessible from increasing number of online platforms and made Weibo service available to a broader user community in a timely manner.

These partnership helped enhance our efficiency in user acquisition amidst intense market competition.

Next on product front.

We've initiated a series of product improvement around social interactions as well as feed and video consumption, improving user engagement and enhancing content consumption efficiency.

Let me first elaborate on our work around enhancing Weibo's community product.

First, on enhancing social features in the public domain of traffic, we rolled out a product called "Hardcore Fans", aiming to build bond between fans and content creators.

In the first half of 2019, social interaction generated by user grew double digit year-over-year.

Second, we revamped our community products, such as Super Topic and Fans Group.

This will manifest in driving interaction among users, and consequently, user retention and engagement.

As such, over 80% of celebrity accounts and over 20% of Big Vs already have their own Super Topics.

The number of users engaging in interaction within the Super Topic product grew double digit on a sequential basis.

Our efforts to strengthen community product allow us to attract more self-media to accumulate and engage with fans through community product on Weibo, further driving user growth and user engagement on the platform.

Next on feed consumption.

Enhancing synergies among various feeds to deepen users' feed consumption is the leading factor for the robust growth of feed refreshment and impressions in the second quarter.

For instance, we have integrated Hot Search and Hot Trend feeds embedded in the Discovery Zone in the second quarter, which largely enhanced user consumption of content and time spent.

In June, users who consumed vertical content in the interest feeds after accessing hot search increased 40% year-over-year.

Meanwhile, through our efforts to improve vertical content recommendation, we still track exposure to mid-tier and long tail vertical content grew 50% quarter-over-quarter.

All this endeavor contributed to a 50% year-over-year growth of refreshment of interest-based fees in the second quarter.

Finally, on video consumption, we continue to improve PGC video production and consumption experience.

We have further optimized the mechanism through which we're proactively inviting content creators to generate quality video content and single out quality video contributions by categorization and tagging.

Additionally, we focused on enhancing the consumption experience of quality short videos, introducing food and cosmetic vertical channels, in the video community.

In June, the number of daily posts of PGC videos grew double digit year-over-year.

Second, we continue to enhance our video recommendation and distribution capabilities.

To share some metrics, video views on our platform grew double digit on both annual and sequential basis in June.

Moving on to content.

In June, a number of top content creators with number of posts and views generated all delivered double-digit growth year-over-year.

Meanwhile, compared to the same period last year, social interactions initiated by top content creators grew robustly.

The encouraging result was primarily attributable to the below 2 factors.

First, as I mentioned above, sales of top content creator are more community-centric on Weibo, which encouraged top content creators to accumulate loyal fans and then to deepen communication with their fans using Super Topic and Fans Group product.

As a result, engagement of top content creator on Weibo grew robustly, allowing Weibo to attract more KOLs from other platforms to accumulate fans by means of fans community product.

Second, we enhanced platform traffic distribution for content of top verticals in interest-based feeds, including Hot Weibo feed and Hot Search.

This quarter, we focused on top verticals to optimize the process of encouraging quality content creation by top content creators and supporting traffic distribution for these content in the interest-based feeds and Hot Search, promoting vertical top content creators' ability to capture additional traffic.

For example, compared to December last year, content exposure from fashion and cosmetic verticals in the interest-based feeds and in Hot Search increased over 100% and 300% accordingly.

In the next coming quarters, we'll expand our practice in top verticals to other vertical areas, often targeted traffic to promote content distribution and facilitate vertical content generation.

Lastly, on monetization.

In the second quarter, our KA revenue continued to deliver solid growth, up 12% year-over-year or 19% on a constant currency basis.

Despite ad budget cutback from several industry amidst macro uncertainties, we continue to reinforce our strength in the KA sector.

Our primary focus at this stage is to drive up ad spend from the relative to the macro-resilient industries.

To achieve this, we consistently bring forth innovative ad format against our customers' feeds, providing fresh marketing experience.

For example, in the second quarter, our newly launched ad product, featuring a combination of the first app opening ad and the top inventory in the feed to compound campaign effect, resonated with the brand advertisers.

In addition, leveraging our strength and advantage in hot topics, celebrity, KOLs, IP content such as variety show and movie and other PGC video content, an increasing number of brand advertisers chose Weibo as their social marketing platform.

For example, along with Samsung launched its new model of Series A, the brand advertiser worked with us and initiated #VlogAFunRecord# event on Weibo.

The event invited more than 20 KOLs whose fans are over 10 million to participate in the event, in the event topic discussion and distribution and further attracted over 3,400 top content creators largely through related user enhancement and engagement.

As a result, event topic views was 3.7 billion and video views around the event reached 500 million.

According to third-party data, brand transformation for Samsung's model A80, a flagship product of Samsung Series A, increased 143%.

Meanwhile, an increasing number of customer wish to uplift their brand image with the domestic consumption upgrade.

As such, we optimized our local sales agency structure to enhance our ability to acquire more traditional local TV brand advertisers, supporting our strategy to further expand local KA customers scale.

For example, in Zhejiang province, the number of local KA customer and their marketing spend increased nearly 100% and over 200% year-over-year, respectively.

On the SME business side, we still face fierce competition in the performance ad market.

That said, leveraging the incremental ad inventory brought by traffic growth.

We believe there's still ample room to grow our revenues.

Thanks to the optimization in channel and product, SME ad revenue generated in the second quarter was flat year-over-year in renminbi term with effective CPM stabilized quarter-over-quarter.

Let me share more color on our work ahead.

First, we will focus on stabilizing ad spend from the top customers.

We'll establish a separate team to serve top ad revenue customer with customized service and product in order to optimize their ad performance and better understand their ad spend pattern.

Overall, ad spend from TOP SME customer stabilized sequentially in the second quarter.

Second, on our adjustment of ad agency structure and management, we encourage our sales agency to develop new customers and expand new industries while strengthening the market order.

As a result, ad spend and retention rate of the newly acquired customer steadily improved, contributing higher proportion to the total SME ad revenues.

Third, we made strides in increasing the overall ad performance through various optimization on the product and operation front, unifying the efforts of the product, operation and sales team.

For example, the traffic direction efficiency of our vertical video ads increased significantly, leading to significantly better ad performance and higher sell through rate of the product.

Lastly, we have also been promoting our KOL marketing among SME customers, aiming to help customer attract user's attention and achieve higher ROIs through the incorporation of brands, KOL and events.

For example, Wonder, a Japanese cross-border online shopping platform, together with its brand spokesman, @Yamashita Tomohisa, initiated an e-commerce promotion event, #SakuraFestival# on Weibo.

During the day, more than 1 million fans posted and distributed related content, increasing brand awareness.

Wonder app downloads ranked 16 in the shopping app chart, significantly up from 42 at the start.

To conclude, the performance advertising market in China is still seeing supply over demand dynamics.

As such, while maintaining sufficient ad inventory to offer, we will still have to mitigate the changes on the demand side.

In such scenario, we'll have to go through a transition period with structural changes on our customer composition as well as our comprehensive optimization on ad products to gradually earn recognition from more customers, and thus meaningfully impact our top line growth.

In the third quarter, we will further upgrade our Super FST products, such as empowering content-based targeting, optimizing traffic direction design, improving the traffic direction performance within interaction scenarios, just to name a few.

We believe that endeavor to advance Super FST systems can help us acquire more customer and additional ad budget in the future.

With that, let me turn the call over to Fei Cao for financial update.

Thank you, Gaofei, and hello, everyone.

Welcome to Weibo's Second Quarter 2019 Earnings Conference Call.

Let's start with our user metrics.

Weibo's MAUs reached 486 million in June 2019, representing a net addition of 55 million users on a year-over-year basis.

Weibo's average DAUs reached 211 million, a net addition of 21 million users on a year-over-year basis.

Mobile MAUs represented approximately 94% of total MAUs.

Turning to financials.

As a reminder, my prepared remarks will focus on non-GAAP results and all comparisons are on a year-over-year basis unless otherwise noted.

Weibo's second quarter 2019 net revenue was $431.8 million, up 1% or 7% on a constant currency basis.

Operating income reached $166.2 million, representing operating margin of 38% compared to 39% last year.

Net income attributable to Weibo was $156.4 million, representing a net margin of 36% compared to 37% last year.

Diluted EPS was $0.68, flat year-over-year.

Let me give you more color on revenue.

Advertising and marketing revenue for the second quarter 2019 reached [$310.7 million] (corrected by company after the call), flat, or an increase of 6% on a constant currency basis.

Mobile ad revenue was $319.2 million, up 5%, contributing approximately 86% of total ad revenue, up from 82% last year.

Moving on to KA.

In the second quarter, key ad revenue reached $171.6 million, up 12% or 19% on a constant currency basis.

From the industry perspective, FMCG continued to exhibit strong resilience and throughout the KA revenue book as Weibo's social marketing solution resonated well with these brand advertisers to initiate campaigns, enhance brand awareness, leverage influencers and social assets, accumulated to target relevant audience for brand loyalty and sales conversion.

We are also pleased with the solid performance of entertainment sector despite industry headwinds, largely owing to Weibo's leading position as an essential social media platform to distribute and promote entertainment content.

Turning to SMEs.

In the second quarter, Weibo's SME ad revenue reached $174.9 million, down 6% or flat on a constant currency basis.

Our effort to enhance ad performance, optimizing sales channels and differentiating our social ad products have taken some initial effects in the second quarter to retain existing customers, tap into under-monetized verticals and attract new customers to the platform.

Nevertheless, since the unfavorable advertiser demand and the inventory supply dynamics still persist, we will continue to face near-term challenges from certain large-ticket item categories and online gaming sector based on tough comp last year.

Ad revenues from Alibaba were $24.1 million, down 23% or 18% on a constant currency basis, which is slightly better than our expectation as we had a particularly difficult comp in '18 Q2, with ad revenues from Alibaba growing triple digit year-over-year during the same period last year.

The ad product, video and the search ad product continue to show strength and outperform other ad products, riding on the strong momentum of user traffic through search and video.

We're also delighted to see the increased adoption of social marketing solutions such as KOL marketing for advertisers as an integral part of their ad content.

Value-Added Service, VAS, revenue was $61.2 million in the second quarter, up 8% or 15% on a constant currency basis.

The increase was mainly attributable to the revenue derived from the live streaming business and was partially offset by decrease in gaming revenue.

Turning to costs and expenses.

Total costs and expenses for the second quarter was $265.6 million, up 2%.

The increase in costs and expenses was mainly resulted from incremental cost of revenue share of live streaming business and increase in personnel-related costs and was largely offset by 24% year-over-year decrease of sales and marketing expenses, resulting from a more disciplined channel investment strategy and better execution of marketing content.

Operating income in the second quarter was $166.2 million, representing an operating margin of 38% compared to 39% last year.

Turning to income tax.

Under GAAP measure, income tax expense for the second quarter was $26.1 million compared to $25.1 million last year.

Net income attributable to Weibo in the second quarter was $156.4 million, representing a net margin of 36% compared to 37% last year.

Turning to our balance sheet and the cash flow items.

As of June 30, 2019, Weibo's cash, cash equivalents and short-term investments totaled $1.56 billion.

In the second quarter, cash provided by operating activities was $132.8 million.

Capital expenditures totaled $3.2 million, and depreciation and amortization expenses amounted to $6.7 million.

Now let me turn to business outlook.

In light of currency translation risk, our business outlook was focused on financial estimate on a constant currency basis.

We anticipate our third quarter 2019 net revenue to increase from 6% to 9% year-over-year on a constant currency basis.

This forecast reflects Weibo's current and preliminary view and is subject to change.

Before turning to the Q&A session, I'd like to add a brief note on USD 800 million senior note offering our company completed in early July.

The Note bear an interest rate of 3.5% and are due in 2024.

We have received a total of approximately $793 million net proceeds after deducting underwriting discount and commission and estimated operating expenses payable by us.

We plan to use the proceeds from the offering for general corporate purpose to support long-term development of the company.

With that, let me now turn the floor over to the operator for the Q&A session.

(Operator Instructions) Your first question comes from the line of Gregory Zhao from Barclays.

So actually, I have 2 questions.

The first one, with a very impressive user growth momentum in this quarter, just wanted to check how shall we think about the sustainability of the growth trend in Q3 and in Q4?

And what's your strategy to maintain the growth momentum?

And the second one is on the content.

So when we're coming close to the National Day anniversary, I just want to have an update from the perspective of the regulation around social content.

[Interpreted] First, we see very strong user growth in this quarter.

We're adding over [55 million, 21 million] (corrected by company after the call) MAU and DAU, respectively.

That, I think the net additional users accelerated notably versus prior quarters.

What we see is, for example, the frequency of refreshments, the video viewership and also in terms of the user participating in their interaction on the platform have grown even faster than the pure number of users growth.

And we also noted this trend continued in the last 2 months going to the third quarter.

I think that the growth really comes from the 2 aspects as we're indicating in the prepared remarks.

I think Weibo--'suser base has already been very large and that Weibo had a very strong network effect.

Like for the certain hot topics or trends, we were able to track organic traffic from those events, and that itself has improved our user acquisition efficiency.

I think the second point is that, it comes from our ability to enhance the platform's social attributes.

As I indicated that the interaction between the fans and the Big Vs has beefed up quite significantly.

And on top of that, we see our platform has the ability to attract other Big Vs from other platforms so that we believe that trend can continue.

And also with our new fans features, such as hardcore fans --and fans community further strengthen the interaction relationship between our fans and the content generators.

In summary, I think we're benefiting from the ability to operating the hot trends or hot events, that help us to improve the efficiency in new user acquisition, and our ability to recall our users.

On top of that, our community products was able to attract Big Vs from other platforms even including those live streaming platforms, so that we created a bigger platform for the Big Vs and the fans to interact.

As we indicated in the past, for regulatory events that Weibo's platform feature is not limited to one particular area.

For this year, in particular, in welcoming the National Day for 70 years anniversary, entertainment industry inevitably would be negatively impacted.

Our contents are not limited to the self-media.

We have the vast majority official accounts available on our platform.

So in an event like this, we are actually benefiting from the more constrained regulatory environment as our content will continue to be supplied from those accounts with the validity and the more formal voice.

Your next question comes from the line of Alicia Yap from Citigroup.

My question is related to the advertising budget and also Weibo competitive positioning.

So can management share with us or elaborate a little bit like, what are the main reasons why the ad budget from the KA account is more resilient as shown in the recent quarter?

Do you think that they are more resilient towards just Weibo platform while they are cutting back the budget on other platforms?

If so, what are the reasons that hold up Weibo?

And then can these be sustainable?

Will Weibo see any threats in the future?

[Interpreted] When we look at key accounts growth rate for second quarter, we have to consider the tough comp due to World Cup-related promotion ads in last year, and that factor will also impact the growth rate for Q3 as well.

As I indicated, part of the regulatory reason, some of the IP video shows has been postponed on the video platform.

These had a negative impact on certain cosmetic customers, and their spending on our platform as well.

Because their budgets largely have to be matched to the reschedule of the blockbuster IP program.

If we break this further into the industry segment, our growth are largely dependent on those few industry segments such as FMCG.

Auto has delivered a reasonable growth in the second quarter so does e-commerce.

However, a few other industry which are less resilient such as the 3Cs, cellphone manufacturers, these are the ones we see a quite considerable slowdown in terms of their spending for marketing dollar.

So with the uncertainty resides in the macro and those key accounts, our focus has been shifted much more to our products' competitiveness in the marketplace.

I think there are 3 areas we're focusing for our KA revenue growth, starting from a product perspective.

Started number one, it's an integral market effect with the performance and the branding, that's particularly true with FMCG and e-commerce industry segment.

That's the area we're expanding beyond our traditional brand advertising.

And we believe there's a good growth potential to taking on their performance-related ad budget.

With our strong inventory available with our celebrity and our KOL, we're leveraging that advantage with the brand marketing as we see brand marketing moving very quickly to the social needs.

So that we want to make sure we're definitely taking advantage of this movement.

As I indicated in the prepared remarks, even some of the cases we have done for our automobile industry, we've been leveraging our celebrity resources on the platform to take additional budgets out of these customers.

The other element, as I indicated, we are moving more aggressively to taking ad budgets from regional brands.

Historically, these were brands' marketing focus were on the local TV station.

Now we believe that's one of the other areas we see growth potential.

I think in summary, these 3 areas are the focus areas, focus points for us to grow our key accounts and continue to enhance our competitive edge in the key accounts marketing.

Your next question comes from the line of Bill Liu from Goldman Sachs.

My question is on the SME advertising.

So could you give us some updates on the strategies to grow this segment?

Because it seems that the intense competition environment, given some of the private players have raised a very high target for the year.

And especially on the improving conversion rate front, also is thereany new initiative or strategic focus for rest of this year?

[Interpreted] Even though we have experienced better-than-expected SME revenue delivered in the second quarter, we see a lot of potential for us, we can do better.

Putting aside the ROI and the ECPM, as I indicated, ECPM rate has been relatively stable on a quarter-over-quarter basis.

I think the main issue resides on the demand side as we continue to see the weakness on that particular area.

And that I think, for us, the issue to resolve this, to really try to raise our sell-through rate in the coming quarters.

I think right now we see a mismatch in terms of the commercial sell-through with our growth of our user traffic.

At this moment, these 2 haven't been matched very well.

That's the key focus for us to do for the third quarter.

And also, in the OCPM area, we needed to further grow our targeting ability as well as our algorithm.

I think in terms of the industry segment, particularly for education and gaming, we were less flexible in terms of user acquisition strategy.

That was reflected partially in our distributor policy types of things.

So we are definitely making some shifts in that area in the coming quarters.

On top of that, I think we're continuing to focusing on the new customer acquisition.

Even though in the second quarter, our new customer spending as a percentage of revenue has grown meaningfully, we think we can do better, even better in the quarters to come.

I think as a summary, what we are facing today in terms of SME customer segment, the key problem is the sell-through rate.

So that will be the focal point in the second half of 2019.

In terms of the top customer within the SME customer segment, we need to provide more flexibility in terms of pricing and enhance our service team.

So also on the new customer acquisition area, I think we have to be much more aggressive when compared to the past.

This concludes our conference call today.

Thank you for joining us.

We'll see you next quarter.

Ladies and gentlemen, that does conclude the conference for today.

Thank you for participating.

You may now disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]