Weibo - Earnings Call - Q2 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to Weibo Reports Second Quarter twenty twenty Financial Results Conference Call. And at this time, all participants are in listen only mode. And after the speakers' prepared remarks, there will be a question and answer session. And please be advised that this conference is being recorded. I would now like to hand the conference over to your first speaker for today, Ms.

Sandra Zhang. Thank you. Please go ahead, ma'am.

Speaker 1

Thank you, operator. Welcome to Weibo's second quarter twenty twenty earnings conference call. Joining me today are our Chief Executive Officer, Gaofei Wang and our VP Finance and Interim CFO, Cao Fei. This conference call is also being broadcast on Internet and available through Weibo's IR website. Before the management remarks, I would like to read you the safe harbor statement in connection with today's conference call.

During today's conference 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 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 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 would like to remind you that our discussion today includes certain non GAAP measures, which exclude stock based compensation and certain other expenses. We use non GAAP financial measures to gain better understanding of Weibo's comparative operating performance and the future prospects. Our non GAAP financials exclude certain expenses, gains or losses and other items that are not expected without a future cash payment were a non recurring in nature or are not indicative of our core operating results and loss outlook.

Please refer to our press release for more information about our non GAAP measures. As Loi mentioned in prepared remarks, we will open the lines for a brief Q and A session. With this, I would like to turn the call over to our CEO, Gaofei Wang. Thank you. Hello, everyone, and welcome to Weibo's second quarter twenty twenty earnings conference call.

On today's call, I'll share with you highlights on Weibo's user, product, and monetization as well as progress we made on key initiative in 2020. Let me start with our second quarter financial results. In the second quarter, our total revenue reached $387,400,000 a decrease of 10% year over year or 7% on a constant currency basis. Advertising and marketing revenues reached 140,600,000.0 a decrease of 8% year over year or 5% on a constant currency basis. 89% of our ad revenues come from mobile.

On the user front, Weibo's MAU grew 8% year over year to $52,023,000,000 in June 2020, and average DAUs grew 9% year over year to 229,000,000 in June 2020. 94% of Weibo's MAU came from mobile. With the COVID-nineteen pandemic situation in China stabilized and people's work resumption, we observed a normalization of pandemic related cost and consumption, which led to sequential pullback of traffic from the peak level in the first quarter. But it's worth mentioning that we saw notable growth of users' content generation and user engagement during this quarter, backed by our strategy to improve user engagement and retention on top of user growth. Particularly, we have reinforced our investment on fee distribution efficiency and social interactions to enhance user stickiness on the platform.

On the monetization front, we further refined and strengthened our ad offerings designated for clients' evolving market needs during the pandemic. With that and benefiting from domestic ad demand pickup amid the stabilization of pandemic and were were presumption, our assets into the back of recovery trend with our revenue narrowly any any declining rate from prior quarter. In discussing our operating update for the second quarter, I elaborate our progress made in areas of product and monetization. Let's start with user growth and engagement. There are mainly three aspects of progress we made, which contribute to healthy growth of user scale year over year.

First on channel investment. During the first half of the year, we emphasized on synergy between our channel investment efforts and relevant product and operating efforts to provide better content consumption experience for recorded users. For example, we expanded the coverage of the task based red envelope incentives to record users, which improve user engagement. We also enhanced the video content distribution to record user, which increase their time spent on the platform. This initiative helps improve our user acquisition efficiency.

Second, on content operation of Hotchrant. Through the experience in content operation during the pandemic, we have solidified our strength in content operation of social events. In the in the second quarter, our focus was on the location based content operation through HotRent to enhance user acquisition capability in the local market. During the pandemic, we have upgraded content distribution mechanism for location based content. We prioritize the distribution of local content submitted from local media and self medias over existing content selected through data mining, which largely improved content quality and diversity.

And consequently, in this quarter, user who consumed the push location based content doubled year over year. And meanwhile, we launched a subsection in hot search with a focus on location based hot trends in May, aiming to drive content discovery and consumption based on users' geographical regions. In June, daily query of location based hot trends increased by double digit compared with previous months. This achievement help us set a clear framework of location based accounting distribution consisting of content push, feed recommendation, and hot search, underpinned by different cooperation with local media and self medias. This could help us enhance our core competitiveness in the local market.

And lastly, on social interactions, we continue to optimize our user products and drive our user engagement. First, on relationship based feed, we further optimize social content distribution mechanism to drive content consumption efficiency. Secondly, we have enhanced social attributes for super topic and sense group functions and strengthen topic organization and discussion around trend and interest based content. As a result, we saw an uplift in user interactions and their willingness to post. In June, the total number of users who post content increased over 30% year over year, and their daily posts grew over 50% year over year.

To put it into per perspective, it remained indispensable for most user to share live moments and opinions and participate in discussions. And Weibo continue to be a crucial platform to fulfill users' need to express themselves despite the prevalence of video content consumption. Next, let's talk about video and live streaming. As I mentioned last quarter, we plan to increase investment in the PGC and UGC video content this year. Accordingly, we have provided targeted operation and product support.

For u for UGC video, we focus on traffic expansion and distribution efficiency to drive monetization around UGC video ecosystem. With the stabilized traffic for UGC video contents post pandemic, Our revenues generated through UGC videos in second quarter grew nearly 40% quarter over quarter, and July performance kept the same momentum as well. For PGC video, leveraging our differentiated vision as the leading social media, we attempted to attract more video content creators to grow on Weibo and enhance our user acquisition capability and traffic in the PGC video market. We have seen some progress made as the scale of PGC content creators continue to expand. In June, both the number of PGC content creators and their daily video submissions increased over 50% compared with December.

In July, we launched a project called video account, aiming to further ramp up video traffic and facilitate the social relationship establishment by content creators, which we believe will bode well for us to promote content creators engagement and retention on Weibo. Turning to live streaming. In the first half of the year, live streaming sector has enjoyed rapid expansion during the pandemic. To capture market opportunities, we launched new initiatives in live streaming during this period and further refined our position and focus for the business. Let me elaborate.

The operation of Weibo live streaming focused on topic based IP marketing and advanced interactions around live streaming content. We roll out hot topic list of live streaming content with enhanced traffic support, aiming to promote influence of live streaming content on Weibo and strengthen our position as an important marketing channel for the live content distribution. Take top e commerce live host as an example. In the second quarter, over 60% of the top e commerce live host has account and broadcast on Weibo, and their weekly topic based host increased by over two times compared with that before launching the topic list, enticing other hosts to advertise and accumulate fans on Weibo as well. We also revamped the live streaming product to further integrate with Weibo's core product and improved traffic distribution mechanism to amplify live content exposure on the platform.

In mid July, we rolled out reservation feature for live streaming content and reminder feature on top of the relationship based feed, which help live hosts to precisely target fans group and achieve better result through private domain of traffic. In July, we saw higher number of live content generation by host who adopted reservation feature and their number of viewers and interaction in the live shows more than doubled from June. To sum up, our initiative will benefit Weibo's live streaming ecosystem. For one thing, with the growing base of top live hosts accumulating fans and promoting live content, we benefited from both traffic and commercial demand arising from this group of users. For another, we have made good progress in our cooperation with all our live streaming.

And meanwhile, self media live streaming also demonstrate good momentum with increasing adoption of our reservation and same targeting functions. This encouraging chance would ultimately benefit the build out of our live streaming ecosystem. On the monetization front, with the stabilization of pandemic in China and a gradual economic recovery, Weibo's advertising business exhibited recovery trend in the second quarter with ad revenues decreasing 8% year over year or 5% in GMV terms, improving from prior quarter in terms of annual trend. Our KA revenue decreased 3% year over year, was flat in the mid term and increased 30% quarter over quarter. The solid recovery of our KA ad business in the second quarter was mainly driven by two factors.

For one thing, externally, brands ad budget has come back at decent pace, entertained by the reopening of domestic economy and various incentives to drive consumption, such as the June 18 e commerce event. Brand advertise a broadly or step up their promotional efforts with an on track product launch schedule. On top of the rebound of the overall ad demand, we continue to see upside from the prevailing trend of ad budget shift from offline to online, which has been accelerated by the pandemic. Internally, Weibo has made good progress in reinforcing our differentiated value proposition to customers. We beef up our efforts to optimize ad offerings and improve service quality to be well positioned to serve brands' marketing objectives, including new product launch, celebrity marketing, how event marketing as well as KOL purchase intent cultivation.

Take our cooperation with the block block blockbuster reality show sister who makes ways as example. Leveraging the public's heated discussion around the show and also significant traffic of the show, We not only offer strong brand exposure for the show's sponsors such as Ealy Dairy and Oreo platform, but also attracted customers such as Tom Ford, Lancome, Essex, and Aman Aman, etcetera, to market with us with diverse content curated by our operational team based on the IP. Leveraging recovery marketing demand and more tailor made product offerings, several key industries of Ka business demonstrated nicely recovery trend and exhibited growth trajectory in terms of ad spend in the second quarter on an annual basis. Moving on to SMEs. Our SME ad revenues decreased 21% year over year or 18% in GMV terms.

And sequentially, SME ad revenue increased 16%. Amid the headwinds of pandemic after months and the competition, we believe it still takes time for the SME business to fully recover. During the first half of the year, we revisited our competitive strategy for our performance ad business from a longer term perspective and devised a clear road map on the organizational structure and ad offerings, fronts accordingly. Let me elaborate. First, we focus on driving the the adoption of our integrated content plus performance as solution among key industries.

Specifically, we reformed our organized organizational structure to empower seamless cooperation between our sales team and our product operational teams as well as ad agencies. Leveraging such synergies, we endeavor to develop marketing paradigm that highlights Weibo's differentiation in content offerings, built upon our operational understanding of of each specific industry. In the first half of the year, we started to pilot such industry specific ad offerings with the gaming and education sectors, which resonated well among our customers. With the success stories, we will extend such integrated common plus performance paradigms to cover more industries so as to capture higher ad wallet share in the future. Second, with focus on improving ad performance and ad placement efficiency, we revisited the entire ad placement process of Superfenced Home and revamped the system accordingly to tackle all issues identified.

We sought to optimize advertisers' experience in placing ad with us in the areas of ad creation, optimization, and data analytics. The fully upgraded system has opened up to customers during this month. On the ad performance front, we simplified ad formats and further improved our feed ad conversion. Currently, we have fully rolled out the new video and image ad formats to customers, leading to nearly 50% and over a 100% increase in average traffic direction ratio with new video and video and image ad formats respectively compared with the previous one. Additionally, we took a targeted approach to optimize traffic control, add attribution and OCPX coverage.

We are encouraged to see a wider OCPX adoption among industries as well as higher penetration in terms of Aspen. With solid execution of these above initiatives, we are well positioned to enhance our market competitiveness and deliver further recovery on our Performance App business in future. With that, let me turn the call over to Caofei for financial review. Thank you, Gaofei, and hello, everyone. Welcome to Weibo's second quarter twenty twenty earnings conference call.

Let's start with user metrics. In June 2020, Weibo's MAUs reached five twenty three million, representing a net addition of approximately 37,000,000 users on a year over year basis. Weibo's average DAUs reached two twenty nine million, representing a net addition of approximately 18,000,000 users on a year over year basis. Despite the normalization of user traffic from the peak level in the first quarter, we will maintain the decent level of user activities with higher proportion of user generating content on the platform and higher user engagement during this quarter. Let's turn to financials.

As a reminder, my prepared remarks would focus on non GAAP results and all the comparisons on a year over year basis, unless otherwise noted. Now let me walk you through our financial highlights for the 2020. We saw the overall recovery for the advertising business in the second quarter with the pandemic largely brought under control in China. Weibo's second quarter twenty twenty net revenue was and $87,400,000 a decrease of 10% or 7% on a constant currency basis, reaching the high end of our guidance. Operating income was $121,900,000 representing operating margin of 31%.

Net income attributable to Weibo was $114,500,000 and the diluted EPS was $0.50 Now let me give you more color on revenues. Weibo's advertising and the marketing revenue for the second quarter twenty twenty reached $314,600,000 a decrease of 8% or 5% on a constant currency basis. Mobile ad revenues were $304,400,000 contributing approximately 89% of total ad revenues, up from 86% last year. Moving on to KA. In the second quarter, Weibo's KA ad revenues reached $165,900,000 a decrease of 3%, all flat on a constant currency basis.

Excluding the BARDA transaction revenue impact from handset sector, KA ad revenues would have increased 9% on a constant currency basis. On a sequential basis, KA ad revenues grew 30%, reflecting a net rebound from prior quarter. The solid recovery of our KA advertising business was mainly attributable to the well controlled pandemic situation in China, which paved the way for business activity recovery and improving advertising demand as well as our efforts in driving value for advertisers to achieve branding plus performance effects with our unique social marketing solutions. By industry, FMCG category began strength post pandemic and was back to growth trajectory in the second quarter. E commerce sector also gained momentum as e commerce platforms allocated incremental resources into this year's June 18 event promotions to capture pent up demand from customers.

This is also well demonstrated in the ad revenues from Alibaba, which grew 48% or 53% on a constant currency basis to 35,700,000 in the second quarter. Besides this, as the pandemic further fueled ad budget shift from offline to online, we saw increasing adoption of our innovative ad product offerings such as online product launch solution from handset and automobile sector this quarter. On FlipSat, the recovery pace of movie and entertainment sector and the luxury industry lagged behind overall branding advertising business rebound. As the risk of this sporadic outbreak in China and the coronavirus resurgence in certain global areas still linger, which could further disrupt the business operations and the vacant consumer demand. Turning to SMEs.

In the second quarter, Weibo's SME ad revenues reached $138,900,000 a decrease of 21% or 18% on a constant currency basis. Despite uptick in economic activities this quarter, many small and medium sized advertisers continued to face headwinds in their business operations, especially for offline merchants. Consequently, we anticipate that it will take time to the overall SME spend to rebound to the pre pandemic level. Even though online sectors such as gaming and online education continued to book encouraging growth rate on a year over year basis this quarter. Last said, on a sequential basis, SME ad business demonstrated a moderate recovery from the first quarter trough, up 16% quarter over quarter.

Apart from normal seasonality, we are encouraged to see the gradual rebound from industries like e commerce and certain local services as consumption recovered. On the contrary, ad spend from gaming and online education saw moderate pull back on a sequential basis as expected with users online time spent normalizing. While the actual recovery pace of advertisers ad budget is beyond our control, we proactively took the window to revamp our ad bidding system and optimize ad products in the hope of driving broader OCPX adoption for smarter targeting, higher ad placement efficiency and the better ad measurement, which ultimately bodes well for us to capture higher ad worth share amid competitive landscape of performance ad market in the long run. Value added service VAS revenues were $46,800,000 in the second quarter, a decrease of 23% or 21% on a constant currency basis, primarily due to decrease of live streaming business and was partially offset by the increase in membership revenues. Turning to costs and expenses.

Total costs and expenses for the second quarter was 2 and $65,500,000 flat year over year. Operating income in the second quarter was 121,900,000.0 representing operating margin of 31% compared to 38% last year. Turning to income tax and a GAAP measure. Income tax expense for the second quarter was $14,700,000 compared to $26,100,000 last year. The increase was mainly attributable to a deferred tax charge recognized from fair value change of an investment in the second quarter this year.

Net income attributable to Weibo in the second quarter was $114,500,000 representing a net margin of 30% compared to 36% last year. Turning to our balance sheet and cash flow items. As of 06/30/2020, Weibo's cash, cash equivalents and short term investments totaled $2,330,000,000 compared to $2,400,000,000 as of December 3139. In the 2020, cash provided by operating activities was $121,700,000 Capital expenditures totaled $8,400,000 and depreciation and amortization expenses amounted to $6,900,000 Now let me turn to financial outlook. We anticipate our third quarter twenty twenty net revenues to decrease by 5% to 7% year over year on a constant currency basis.

This forecast reflects Weibo's current and preliminary view and is subject to change. With that, let me now turn the call over to the operator for the Q and A session.

Speaker 0

Thank you. Ladies and gentlemen, we'll now begin the question and answer session. And for your questions, please press star and the number one, and wait for your name to be announced. And to cancel the request, it is the pound for hash key. Once again, for your questions, First question from the line of Gregory Zhao of Barclays.

Please go ahead.

Speaker 2

Hi, management. Thanks for taking my question. So my question is about advertising business. So first, how shall we think about the Ka and SME advertising recovery trend in second half? And what's your plan to further improve the monetization?

And also in the prepared remarks, you mentioned advertising system upgrade. So how shall we think about the OCPX trend and the coverage post this upgrade? And also, it'd be helpful if you can share some colors for the entire online advertising market. Any colors about competitive dynamics will be very helpful. Thank you.

Speaker 1

First, let me briefly recap our second quarter performance and share some color on the recovery trend seen so far for KN and SMBC in the second half. On the KA front, we saw the overall KA business come back in nice phase during the second quarter and leveraging the recovery of the marketing demand and also the improvement of the social marketing capability of our of our team. And several key industries, including FMCG, e commerce, and automobile already delivered positive year over year trends. However, entertainment and travel sectors still fell short of the ad dollar compared with same period last year due to the pandemic, which dragged the growth of KA business. Entering to the third quarter, we saw the overall brand sentiment has turned more positive, backed by the stabilization of pandemic situation and improvement of the macro environment, especially the consumption side.

As mentioned earlier, key factors of brand business such as FMCG automobile and handsets continue to book healthy growth trend in the third quarter. But on the on the flip side, despite some sequential pickup, sectors like entertainment are still on on a descending trend given the relative weak market demand compared with same tier last year. At this moment, assuming no further impact from the pandemic in the coming quarter, we expect the K business to continue to improve sequentially with a stronger demand fueled by the ecommerce seasonality. On the SME front, the performance ad front, despite the overall ad budget pickup from from a low point in the first quarter, SME business largely remain customer remain cautious in their marketing spend since the SME SME SME advertiser are generally more vulnerable to the macro downside, particularly for the offline merchants. So that SME SME business continue to decline on a year over year basis.

While on the upside, sectors like gaming and education continue to grow very strongly with triple digit growth year over year and also e commerce sectors, they're reaching the school meetings, e commerce festival and the and the and the and the live streaming live streaming kind of e commerce improvement. We see the the overall sector rebounding nicely quarter over quarter basis. Entering to the third quarter, our asset investment would further recover sequentially with gaming and education sector continue to outperform. Sequentially, it's also growing very robust ly. However, offline merchants continue to face headwinds.

So we took the window to upgrade our bidding system and optimize our service to customers. For instance, we get rid of a few low quality customer and also improve their ad designs, which we believe would naturally impact our SME revenue in the short run, but would benefit our performance ad ecosystem in the long term. In the coming quarter, leveraging the marketing opportunities, workforce by the common seasonality, we will further integrate our resources and strengthen our coefficient with Alibaba to drive value for the ecommerce merchant. For the SME business, which is the, you know, most people focus on, we think the overall performance and market continue to to face this competition, fierce competition with unfavorable demand versus supply dynamics. Given the competition in the in the supply side, our strategy would be mostly tilt towards open market solution that integrate our strength in traffic, KOL, and content, and also enhance our ad placement efficiency.

This is being reflected mainly in the gaming and education sector, which outperformed the overall sector in the first half. And besides the combination of our strength in traffic, KOL, and content, we we also, in the first half of the year, also upgraded the super surgical ad system to improve the overall advertising efficiency. So currently, the the OCPF coverage has accounted for over 60% of the total SME ex SBM, and we expect it to increase to 80% toward the end of the year. And we also we also emphasize on the conversion capability by introducing more direct response features in our ad offerings. Currently, the video and image based upgraded product meaningfully drive up our traffic direction ratio and overall ad performance.

Okay. Okay. Thank you.

Speaker 2

Thank you.

Speaker 0

Thank you. Thank you. Next question is from the line of Miranda Zhuang of Bank of America. Please go ahead.

Speaker 3

Thank you, operator, and thank you management for taking my question, which will be about the video content and video monetization. Can management explain to us what's the positioning of your video account initiative in the v video products space? And also, what's the growth strategy for that? And how is the progress of the video content creator development? And then secondly, how is the monetization for the video accounts and for your video ads?

And what could be the potential impact to the profit margin resulting from the video ad sharing? And lastly, if time is allowed, can you update us how is the activity level and the retention level trending for your top content creators? And what's your competition strategy for the top content creators? Thank you.

Speaker 1

Okay. In terms of the video account you mentioned, the initial thought to launch it is to attract those emerging video con content creators to join Weibo platform by offering a more systematic video product to enrich our overall content ecosystem. On the content generation side, the video account will enable us to attract more content creators to join the platform. With the with the rise of the video content platforms and the lower entry lower barrier for the video content creation, a bunch of the high quality video content creators have emerging emerged in China. With video accounts, we could ease the process of video submission and facilitate social assets at accumulation and interaction for those video content creators.

Weibo's multimedia formats via the distribution capability and monetization opportunity will be very attractive to the top video content creators. Now that with the launch of the video accounts, we could offer a more systematic approach to in type high quality video content creators to join Weibo and enrich our overall KOL ecosystem. As of now, we have over 500,000 content creators joining the video accounts program, among which over 5,000 have a fan base over a million per person. With, more and more video content creator joining our platform through the program, we could attract wider user community and through the diverse and high quality video offerings. For instance, for the gaming for the online gaming vertical, the total fan base accumulated by the video content creator in the gaming vertical grew over 40 in the past year.

And the overall influence our influence in the gaming vertical also being elevated. Additionally, this video content creator not only post video content on our platform, but also interact with fans, in image and text formats, further leading to different user engagement on our platform. For monetization, in the first half, we have made great progress in ramping up our video ad monetization efficiency. On the way hand, we saw pretty good chance for video related metrics, such as user who consume video on Weibo and also video traffic, leveraging the improved content distribution efficiency. And for another, we have enriched and optimized our video ad offerings under different video consumption scenarios.

And for example, the the watch plus the end can be in product could deliver better ad format and conversion result, which which will improve thus improve the video ad monetization. This is being reflected in the gaming sector with almost all the ad design and creators are in the video forms. And we are also seeing increasing adoption of video formats in the ecommerce and education sector. In terms of the revenue share with video content creators, our primary focus is you on the build out of the Weibo video content per system by empowering them to monetize within our system. We share a portion of advertising revenue with them for the video content they share on the platform, and we also share a portion of the ad revenues from the picture post by the content creators.

And this content creator through the quality content they share on the platform, it will provide quality content to the overall platform and also especially in the relationship based feed and also the recommendation feed. For those monetizable traffics they offer, there won't be a revenue share with them in those feeds. And entering to the second half, we will continue to focus on enhancing our distribution efficiency to further drive the video content consumption so as to drive the video and to create a self enforcing video content ecosystem. And if we look at the way for content ecosystem from the broader view, we have been really focusing on the sustainability and diversity of our ecosystem. We not only try or work to drive the engagement of the big weeds, but also nurture the small and medium burly holes key routes with the traffic support.

And we provided a traffic support to those to those very vertical, those small verticals, and have shown nice growth in the traffic brochure of these verticals in the interest based in interest based feed. And in terms of monetization, in addition to the advertising, we also empower the content creator to monetize through various models, including ecommerce, e plus subscription, something like this. And with the monetization opportunity offered, we could further improve our competitiveness in the overall KOL market and reinforcing our content ecosystem. So in recent years, we are able to see the number of top content creators as well as their daily posts and interactions kept on double digit growth year over year. Thank you.

Speaker 3

Thank you, management. Thank you.

Speaker 0

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'd now like to hand the conference back to Ms. Sandra Zhang. Please go ahead.

Speaker 1

Thanks operator, and thank you all for joining us. We'll see you next quarter.

Speaker 0

Thank you, ladies and gentlemen. That concludes our conference for today. Thank you for participating. You may now all disconnect.