Weibo Corporation (WB) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to Weibo Reports Second Quarter 2020 Financial Results Conference Call. And at this time, all participants are in listen-only mode. And after the speakers' prepared remarks, there'll be a question-and-answer session. [Operator Instructions]. 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.

Thank you, operator. Welcome to Weibo's second quarter 2020 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 is 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'd 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 a 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 to result in future cash payments or are non-recurring in nature or are not 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.

[Foreign Language] Thank you. Hello, everyone, and welcome to Weibo's second quarter 2020 earnings conference call. [Foreign Language] On today's call, I'll share with you highlights on Weibo's users, product and monetization, as well as progress we made on key initiatives in 2020. [Foreign Language] Let me start with our second quarter financial results. In the second quarter, our total revenue reached $387.4 million, a decrease of 10% year-over-year or 7% on a constant currency basis. Advertising and marketing revenues reached $34.6 million, a decrease of 8% year-over-year or 5% on a constant currency basis. 89% of our ad revenues come from mobile. [Foreign Language] On the user front, Weibo's MAUs grew 8% year-over-year to 523 million in June 2020 and average DAUs grew 9% year-over-year to 229 million in June 2020. 94% of our Weibo's MAU came from mobile. [Foreign Language] With the COVID-19 pandemic situation in China stabilized and people's work resumption, we observed the normalization of pandemic-related content consumption, which led to sequential pullback of traffic from the peak level in the first quarter. But it's worth mentioning that we still note a growth of user content generation and user engagement during this quarter led by our strategy to improve user engagement and retention on top of user growth. Particularly, we have reinforced our investment on feed distribution efficiency and social interaction 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 a stabilization of pandemic and work resumption, our ad business [indiscernible] declining rate from prior quarter. [Foreign Language] In discussing our operating update for the second quarter, I'll elaborate our progress made in the areas of product monetization. Let's start with user growth and engagement. There are mainly three aspects of progress being made, which contribute to healthy growth of users still [ph] year-over-year. [Foreign Language] 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 record users. For example, we expanded the coverage of cash-based red envelope incentives to record users, which improved user engagement. We also enhanced the video content distribution to record users, which increased their time spent on the platform. This initiative helped improve our user acquisition efficiency. [Foreign Language] Second on content operation of hot trends, through the experience in content operation during the pandemic, we have solidified our strength in content operation of social events. In the second quarter, our focus was on the location-based content operation through Hot Trends to enhance user acquisition capability in the local market. During the pandemic, we have upgraded content distribution mechanism on location-based content. We prioritized 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, users who consumed the push location-based content doubled year-over-year. And meanwhile, we launched a subsection in hot search which is focused on location-based Hot Trends, 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 helped us set a clear framework of location-based content distribution, consisting of content push, feed recommendation and Hot Search, underpinned by different cooperation with local media and self-media. This could help us enhance our core competitiveness in the local market. [Foreign Language] And lastly, on social interactions, we continue to optimize our use of products and drive user engagement. First our relationship based feed, we further optimized social content distribution mechanism to drive content consumption efficiency. Secondly, we have enhanced social attributes with super topic and sense group function and strengthened topic organization and discussion around Hot Trends and interest-based content. As a result, we saw an uplift in user interaction 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 perspective, it remains indispensable for most users to shed light moments and opinions and participate in discussions. And Weibo continued to be a crucial platform to fulfill users' need to express themselves despite the prevalence of video content consumption. [Foreign Language] Next, let's talk about video and live streaming. As mentioned last quarter, we plan to increase investment in the PGC and UGC video content this year. Accordingly, we had provided targeted operation and product support. 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 content post-pandemic, ad revenues generated through UGC videos in second quarter grew nearly 40% quarter-over-quarter, and the 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 continued to expand. In June, both the number of PGC content creators and their daily video submissions increased over 50% compared with December last year. In July, we launched a project called video account, aiming to further ramp up video traffic and facilitate social relationship establishment by content creators, which we believe will bode well for us to promote content creators engagement and retention on Weibo. [Foreign Language] 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 is focused on topic-based IP marketing and sense interactions around live streaming content. We rolled out hot topic list of live streaming content with enhanced traffic report, aiming to promote influence of live streaming content on Weibo and strengthened our position as an important marketing channel for the live content distribution. Take top ecommerce live hosts as example. In the second quarter, over 60% of the top ecommerce live hosts has account and broadcast on Weibo and their weekly topic-based posts 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 live streaming product to further integrate with Weibo as a 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 results through private domain of traffic. In July, we saw higher number of live content generation by hosts who adopted the reservation feature and their number of viewers and interaction in a live show more than doubled from June. To sum up, our initiatives will benefit Weibo's live streaming ecosystem. For one thing, with a growing base of top live hosts accumulating fans and promoting live content, we benefited from those traffic and commercial demands arising from this group of users. For another, we have made good progress in our cooperation with [indiscernible] live streaming. And meanwhile, self-media live streaming also demonstrated good momentum with increasing adoption of our reservation and fans targeting functions. These encouraging trends will ultimately benefit the build out of our live streaming ecosystem. [Foreign Language] On the monetization front, with the stabilization of pandemic in China and the gradual economic recovery, Weibo's advertising business exhibited recovery trends in the second quarter, with ad revenues decreasing 8% year-over-year or 5% in renminbi terms, improving from prior quarter in terms of annual trends. [Foreign Language] Our KA ad revenue decreased 3% year-over-year or flat in renminbi terms and increased 13% 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 spent ad budget has come back at decent pace, entertained by the opening of the [indiscernible] economy and various incentives to drive consumption, such as the June 18 ecommerce event. Brand advertisers broadly step up their promotional efforts with an unchecked product launch schedule. On top of the rebound of the overall [indiscernible], 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 great progress in reinforcing our differentiated value proposition to customers. We beefed 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, hot brands marketing as well as KOL purchase intent cultivation. Take our cooperation with the blockbuster reality show, Sisters Who Make Waves, as an 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 sponsors, such as [indiscernible] and Oreo on our platform, but also attracted customers such as Tom Ford, [indiscernible] and Armani, et cetera, to market with us with diverse content curated by our operational team based on IT. Leveraging recovering marketing demand and more tailor made product offerings, several key industries of KA business demonstrated nice recovery trends and exhibited growth trajectory in terms of ad spend in the second quarter on any basis. [Foreign Language] Moving on to SMEs. Our SME ad revenues decreased 21% year-over-year or 18% in renminbi terms. 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 roadmap on the organizational structure and ad offerings front accordingly. Let me elaborate. First, we focused on driving the adoption of our integrated content plus performance ad solution among key industries. Specifically, we reformed our 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 market intelligence that highlights Weibo's differentiation in content offerings, built upon our operational understanding 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 content 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 [indiscernible] and revamped the system accordingly to tackle all issues identified. We sought to optimize advertisers' experience in placing ads 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 of 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 100% increase in average traffic interaction ratio, with new video and image ad formats respectively compared with the previous one. Additionally, we took a targeted approach to optimize traffic control, ad attribution and OCPX coverage. We are encouraged to see a wider OCPX adoption among industries as well as higher penetration in terms of ad spend. With solid execution of this above initiative, we are well positioned to enhance our market competitiveness and deliver further recovery on our performance ad business in future. [Foreign Language] With that, let me turn the call over to Cao Fei for financial review.

Thank you, Gaofei. And hello, everyone. Welcome to Weibo's second quarter 2020 earnings conference call. Let's start with user metrics. In June 2020, Weibo's MAUs reached 523 million, representing a net addition approximately 37 million users on a year-over-year basis. Weibo's average DAUs reached 229 million, representing a net addition of approximately 18 million users on a year-over-year basis. Despite the normalization of user traffic from the peak level in the first quarter, Weibo maintained a decent level of user activities with higher proportion of users generating content on the platform and higher user engagement during this quarter. Let's turn to financials. As a remainder, my prepared remarks would focus on non-GAAP results and all the comparisons are on a year-over-year basis unless otherwise noted. Now, let me walk you through our financial highlights for the second quarter of 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 2020 net revenues were $387.4 million, a decrease of 10% or 7% on a constant currency basis, reaching the high end of our guidance. Operating income was $121.9 million, representing an operating margin of 31%. Net income attributable to Weibo was $114.5 million and diluted EPS was $0.50 cents. Now, let me give you more color on revenues. Weibo's advertising and marketing revenue for the second quarter 2020 reached $340.6 million, a decrease of 8% or 5% on a constant currency basis. Mobile ad revenues were $304.4 million, 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 $165.9 million, a decrease of 3% of that on a constant currency basis. Excluding the barter 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 nice 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 regained strength post the pandemic and was back to growth trajectory in the second quarter. Ecommerce sector also gained momentum as ecommerce 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 $35.7 million 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 the flipside, the recovery pace of movie and entertainment sector and the luxury industry lagged behind overall brand and advertising business rebound as the risk of the sporadic outbreak in China and the coronavirus resurgence in certain global areas still linger, which could further disrupt the business operations and weaken consumer demand. Turning to SMEs. In the second quarter, Weibo's SME ad revenues reached $138.9 million, a decrease of 21% or 18% on a constant currency basis. Despite uptick in economic activity 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 for the overall SME ad 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. That said, on a sequential basis, SME ad business demonstrated a moderated recovery from the first quarter trough, up 16% quarter-over-quarter. Apart from normal seasonality, we're encouraged to see the gradual rebound from industries like e-commerce and the certain local services as consumption recovered. On the contrary, ad spend from gaming and online education saw a moderate pullback on a sequential basis has impacted, 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 better ad measurement, which ultimately bodes well for us to capture higher ad wallet share amid a competitive landscape of performance ad market in the long run. Value added service (VAS) revenues were $46.8 million 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 revenue. Turning to costs and expenses. Total costs and expenses for the second quarter was $265.5 million, flat year-over-year. Our operating income in the second quarter was $121.9 million, representing an operating margin of 31% compared to 38% last year. Turning to income tax and the GAAP measure. Income tax expense for the second quarter was $14.7 million compared to $26.1 million 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 $114.5 million, representing a net margin of 30% compared to 36% last year. Turning to our balance sheet and cash flow items. As of June 30, 2020, Weibo's cash, cash equivalents and short-term investments totaled $2.33 billion compared to $2.4 billion as of December 31, 2019. In the second quarter of 2020, cash provided by operating activities was $121.7 million. Capital expenditures totaled $8.4 million. And the depreciation and amortization expenses amounted to $6.9 million. Now, let me turn to financial outlook. We anticipate our third quarter 2020 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&A session.

Thank you. [Operator Instructions]. First question from the line of Gregory Zhao of Barclays.

So, my question is about advertising business. So, first, how shall we think about the KA and SME advertising recovery trend in the 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 OCPX trend and coverage post the upgrade? And also, it'd be helpful if you can share some colors for the entire online advertising market and the colors about competitive dynamics will be very helpful. Thank you.

[Foreign Language] First, let me briefly recap on our second quarter performance and share some color on the recovery trends we've seen so far for KA and SME business in the second half. [Foreign Language] On the KA front, we saw the overall KA business come back at a nice pace during the second quarter and leveraging the recovery of the market demand and also the improvement of the social marketing capability of our team. And several key industries, including FMCG, ecommerce and automobiles, 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. [Foreign Language] Entering into 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 sectors of brand business such as FMCG, automobile and handset continued to book healthy growth trends in the third quarter. But on the flip side, despite some sequential pickup, sectors like entertainment are still on a descending trend, given the relatively weak market demand compared with same period last year. At this moment, assuming no further impact from the pandemic in the coming quarter, we expect the KA business to continue to improve sequentially with the stronger demand fueled by the ecommerce seasonality. [Foreign Language] On the SME front, on the performance ad front, despite the overall ad budget pickup from a low point in the first quarter, as any business, customer remain cautious in their marketing spend since the SME advertiser are generally more vulnerable to the macro downside, particularly for the offline merchants. So, the SME business continued to decline on a year-over-year basis. While on the upside, sectors like gaming and education continued to grow very strongly with triple-digit growth year-over-year. And also, ecommerce sectors, leveraging the June 18 ecommerce festival and live streaming kind of ecommerce improvement, we see the overall sector rebounding nicely quarter-over-quarter basis. [Foreign Language] Entering into the third quarter, our SME business further recovered sequentially, with gaming and education sector continue to outperform. And sequentially, it's also growing very robustly. However, offline merchants continued to see 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 customers and also improved the ad designs, which we believe would mask the impact on 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 brought forth by the ecommerce seasonality, we will further integrate our resources and strengthen our cooperation with Alibaba to drive value for the ecommerce merchant. [Foreign Language] For the SME business, which most people focus on, we think the overall performance ad market continued to face fierce competition with unfavorable demand versus supply dynamics. Given the competition in the supply side, our strategy would be mostly tilted towards open market solution that integrates 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. [Foreign Language] And besides the combination of our strength in traffic, KOL and content, we also in the first half of the year also upgraded [indiscernible] system to improve the overall advertising efficiency. Currently, the OCPX coverage has accounted for over 60% of the total SME ad spend. And we expected to increase to 80% toward the end of the year. And we also emphasized on the conversion capability by introducing more direct response features in our ad offering. Currently, the video and image-based upgraded product meaningfully drive up our traffic interaction ratio and overall ad performance.

Next question is from the line of Miranda Hui of Bank of America.

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 initiatives in the video product 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 account 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.

[Foreign Language] In terms of the video account you mentioned, the initial soft launch is to attract those emerging video content creators to join Weibo platform by offering a more systematic video product to enrich our overall content in the system. [Foreign Language] On the content generation side, the video accounts will enable us to attract more content creators to join the platform. With the rise of the video content platform and low barrier for the video content creation, a bunch of high quality video content creators have emerged in China. With video accounts, we could ease the process of video submission and facilitate social assets as accumulation and interaction for those video content creators. With multimedia formats, Weibo distribution capability and monetization opportunities will be very attractive to the top video content creators. Now that with the launch of the video accounts, we could offer more systematic approach to entice high quality video content creators to join Weibo and leverage our overall KOL ecosystem. As of now, we have over 500,000 content creators join the video accounts program, among which over 5,000 had a fan base over a million per person. [Foreign Language] With more and more video content creators joining our platform through the program, we could attract wider user community through the diverse and high quality video offerings. For instance, 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 the image and text formats, further leading to deepened user engagement on our platform. [Foreign Language] For monetization, in the first half, we had made big progress in ramping up our video ad monetization efficiency. On one hand, we saw a pretty good trend for video-related metrics such as user who consumed 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 in the different video consumption scenarios. And for example, the watch plus [indiscernible] product could deliver better ad formats and conversion result, which will improve the video ad monetization. This is being reflected in the gaming sector with almost all the ads we buy in creatives are in the video form. And we are also seeing increasing adoption of video format in the ecommerce and education sector. [Foreign Language] In terms of the revenue share with video content creators, our primary focus is the build out of the Weibo video content flow system by empower 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 posts by these content creators. And these content creators, through the quality of 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 traffic, there won't be revenue share with them in those feeds. And entering into 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 ad revenue and incentives to create a self-reinforcing video content ecosystem. [Foreign Language] And if we look at the Weibo content ecosystem from the broader view, we have been really focusing on the sustainability and diversity of our ecosystem. We not only work to drive the engagement of the big Vs [ph], but also nurture the small and medium vertical KOLs through the tracking support. And we provide this tracking support to those small verticals and have shown nice growth in the traffic exposure of these verticals in the interest based feed. And in terms of monetization, in addition to the advertising, we also empower the content creators to monetize through various models, including ecommerce, VPlus 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 double-digit growth year-over-year. Thank you.

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

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

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