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Weibo Corporation (NASDAQ:WB)
Q2 2019 Earnings Call
Aug 19, 2019, 7:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Weibo Reports Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [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.

Sandra Zhang -- Investor Relations

Thank you, operator. Welcome to Weibo's second quarter 2019 earnings conference call. Joining me today

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

Before the management remarks, I'd like to read 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 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 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 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 and losses and other items that are not expected to result in future cash payments or are nonrecurring in nature or 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 line for a brief Q&A session.

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

Gaofei Wang -- Chief Executive Officer

(Foreign Language) Thank you. Hello everyone, and welcome to Weibo's second quarter 2019 earnings conference call. (Foreign Language) 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.

(Foreign Language) 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 revenues reached $370.7 million, flat year-over-year or an increase of 66% on a constant currency basis, 86% of our ad revenue come from mobile. Non-GAAP net income during the second quarter was $156.4 million, representing a non-GAAP net margin of 36%.

(Foreign Language) 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.

(Foreign Language) In the second quarter, on top of user growth, we progressively focused on improving user retention and engagement as it is particularly important for us to strengthen our competitive edge, and with the deceleration of the growth in overall China mobile Internet population, leveraging and optimizing the platform mechanism in facilitating social interaction and improving content distribution capability, we are encouraged to see enhanced efficiency in content distribution, which helped to grow our user fill and more importantly let to a double digit growth in feed refreshment, impressions and user interactions on a year-over-year basis.

On the monetization front, KA business continued to grow nicely during this quarter, benefiting from the increasing adoption of social ad within clients' ad budget. It is also attributable to sales teams as they gain know-how in addressing customer demand and capturing market opportunities. SME business achieved double-digit growth quarter-over-quarter as our initiatives to refine ad products and optimize sales channel have taken effect despite near-term market challenges still exist.

(Foreign Language) In discussing our operating update of the second quarter, I'll cover the areas of user content and customer of Weibo. (Foreign Language) 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 four 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 was mainly attributable to three areas of progress we make.

First, we used mainly our channel coverage and enhanced user acquisition efficiency to optimize channel investment strategies. Second, the frequency of content consumption produced and interactions have 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 stolen users, leveraging our strength in transformations around the hot events and discussion. Let me provide more color on this initiative.

(Foreign Language) First, from a channel perspective, we had made good progress in our partnership with handset manufacturers and top ACPs benefiting from deepened collaboration with its partner in the content area. MAU from domestic handset continues to grow at double-digit year-over-year. Meanwhile, the cooperation with top ACPs have allowed Weibo content accessible from increasing number of online platform and made Weibo service available to a broader user community in a timely manner. This partnership helped enhance our efficiency in user acquisition amid intense market competition.

(Foreign Language) Next on product front. We initiated a series of product improvement around social interactions as well as feed and user consumption, improving user engagement and enhancing content consumption efficiency. (Foreign Language) Let me first elaborate on our work around enhancing Weibo's community products. First on enhancing social features in the public domain of traffic, we rolled out a product called [Indecipherable] aiming to build bond between events and content creators. In the first half of 2019, social interaction generated by user grew double-digit year-over-year. Second, we've event our community products such as Super Topic and Sensible [Phonetic].

This will manifest in driving interaction among users and consequently user retention and engagements, as such over 80% of celebrity accounts and over 20% of Big Vs already have their own Super Topic. The number of user engagement 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 guests to commit their product on Weibo further driving user growth and user engagement on platform. (Foreign Language). Next on feed consumption, enhancing synergies among various feeds to deepen user 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 consume video contents in interest feed after accessing Hot Search increased 40% year-over-year. Meanwhile, through our efforts to improve vertical content recommendation, we sold traffic exposure to mid-tier and long-tier vertical content grew 50% quarter-over-quarter.

All this endeavor contributed to a 50% year-over-year growth of refreshment of interest-based feeds in the second quarter. (Foreign Language) Finally, on video consumption, we continue to improve PGC video production and consumption experience. We have further optimized the mechanism through which we proactively invite content creators to generate quality video content and single out quality video contribution by categorization and tagging. Additionally, we focus on enhancing the consumption experience of quality short videos introducing our food and cosmetic vertical channels in the video community.

In June, the number of daily post of PGC videos grew double-digit year-over-year. Second, we continue to enhance our video recommendation and distribution capabilities to share some media views on our platform grew double digit on both ending and sequential basis in June.

(Foreign Language) Moving onto content, in June, a number of top content creators and the number of posts and views generated all delivered double-digit growth year-over-year. Meanwhile, compared to the same period last year, social interaction initiated by top content creators grew robustly. The encouraging result was primarily attributable to the below two factors. First, as mentioned above, sales of top content creators are more community centric on Weibo, which include top content creators to accumulate loyal fans and then to deepen communication with the fans using Super Topic and Sensible [Phonetic] 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 exchange community product. Second, we enhanced platform traffic distribution for the content of top verticals in interest-based feed 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 in supporting traffic distribution for this content and interest-based feed and Hot Search, promoting vertical top content creators' ability to capture the additional traffic. For example compared to December last year, content exposure from fashion and cosmetic vertical in interest-based feed and in Hot Search increased over 100% and 300% accordingly. In the next coming quarters, we'll expand our package in top verticals to other vertical areas often targeted traffic to promote content distribution and facilitate vertical content generation.

(Foreign Language) Lastly, on monetization, in the second quarter our KA revenue continued to deliver solid growth, up 12% year-over-year with 19% on a constant currency basis, Despite the ad budget cutback from several industry amid 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 a relatively macro resilient industry. 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 products featuring a combination of ad -- opening ad and the top inventory in the feed to compound campaign effect resonate with the brand advertisers. In addition, leveraging our strength and advances in Hot Topic celebrity and KoL IP content such as variety show and movies and other PGC video content, an increasing number of brand advertisers chose Weibo as their social marketing platform. For example, along with Samsung launches a new model for Series A, the brand advertiser worked with us and initiated [Indecipherable] event on Weibo. The event invited more than 22 [Phonetic] KOLs whose fans are over 10 million to participate in the event topic discussion and distribution, and further attracted over 3,400 top content creators largely relating to user's enthusiasm and engagement. As a result, our event topic views reached 3.7 billion and the media views around the event reached 500 million. According to third-party's data, brand recognition for Samsung's model A80, a flagship product of the Samsung USA increased 143%.

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

(Foreign Language) On the SME business side, we still face fierce competition in the performance ad market. That said, leverage is incremental at inventory bought by traffic growth, we believe there's still ample room to grow our revenues. Thanks to the optimization in channel and product, SME revenue generated in the second quarter was flat year-over-year in renminbi terms with effective TTM stabilized quarter-over-quarter. Let me share you more color on our work ahead.

First, we will focus on stabilizing ad spend from the top customers, we established a separate team to serve top SME customers with customized service and products in order to optimize the 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 customer 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 improving the overall ad performance through various optimization on the products and operations 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 users' attention and achieve higher ROI through the incorporation of brands, KoL and events.

For example, Blender, a Japanese cross-border online shopping platform together with its brand spokesman Yamashita Tomohisa initiated an e-commerce promotion event, Sakura Festival on Weibo. During the day, more than a million fans posted and distributed related content increasing brand awareness. Blender app download went to 16 in the shopping app chart, significantly up from the 42 spot. (Foreign Language) 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 will have to go through a transitional period with structural changes on our customer composition, as well as the 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 update our Super FST products such as empowering content-based targeting, optimizing traffic direction design, improving the traffic direction performance within interaction scenarios, this just to name a few. We believe that the endeavor to begin Super FST systems can help us acquire more customers and additional ad budget in the future.

(Foreign Language) With that, let me turn the call over to Fei Cao for a financial update.

Fei Cao -- Vice President, Finance

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 would focus on non-GAAP results and all the comparisons are on a year-over-year basis unless otherwise noted. Weibo's second quarter 2019 net revenues were $431.8 million, up 1% or 7% on a constant currency basis. Operating income reached $166.2 million representing an 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 revenues for the second quarter 2019 reached $370.7 million, 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 revenues 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 [Phonetic] the KA revenue book as Weibo's social marketing solution resonated well with lead brand advertisers to initiate content, enhance brand awareness, leverage influencers and the 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 revenues 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 effect in the second quarter to retain existing customers helping to undermonetize verticals and attract new customers to the platform.

Nevertheless, since the unfavorable advertiser demand on 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 was $24.1 million, down 23% [Phonetic] or 18% on constant currency basis, which is slightly better than our expectation, as we had a particularly difficult comp in 2018 Q2 with ad revenues from Alibaba growing triple-digit year-over-year during the same period last year.

The ad product, video and search [Phonetic] ad products continue to show strength and outperform other ad products driving on strong momentum of user traffic to search and video. We're also delighted to see the increasing adoption of social marketing solutions such as KoL marketing for advertisers as a integral part of their ad content. Value-Added Service, VAS revenue was $61.2 million in the second quarter, up 8% or 15% on constant currency basis. The increase was mainly attributable to the revenue derived from live streaming business and was partially offset by a decrease in gaming revenue.

Turning to costs and expenses, total cost and expenses for the second quarter was $265.6 million, up 2%. The increase in cost 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 a 24% year-over-year decrease of sales and marketing expenses, resulting from a more disciplined channel investment strategy and the 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 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 will focus on financial estimates on a constant currency basis. We anticipate our third quarter 2019 net revenues to increase from 6% to 9% year-over-year on a constant currency basis. This forecast reflects Weibo's current and the preliminary view and is subject to change.

Before turning to the Q&A session. I'd like to add a brief note on USD800 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 discounts and commissions 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.

Questions and Answers:

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Gregory Zhao from Barclays. Please ask your question.

Gregory Zhao -- Barclays -- Analyst

Hi, management. Thanks for taking my questions. So actually I have two questions. The first one, we see very impressive user growth momentum in this quarter. So just wanted to check how shall we think about the sustainability of the growth trend in Q3 and in Q4 and with your strategy to maintain the growth momentum. And the second one is on the content. So when we are coming close to the National Day anniversary, so just want to have update from the perspective of regulation around social content. Thank you.

Gaofei Wang -- Chief Executive Officer

(Foreign Language) First, we see very strong user growth in this quarter. We are adding over 50 million, 20 million MAU and DAU respectively. I think the net additional users accelerated notably versus prior quarters. (Foreign Language) What we see is the engagement rate, for example, the frequency of our refreshments, our video viewership and also in terms of the user participating and their interaction on the platform has grown even faster than the pure number of user growth and we also noted this trend continued in the last two months going to the third quarter. (Foreign Language) I think the growth really come from the two aspects as indicated in the prepared remarks. (Foreign Language) I think Weibo has -- the user base has already been very large and they had a very strong network effect. So we see like the leveraging like for the certain hot topics or trends, we were able to track organic traffic from those events. And also we were able to -- that itself has improved our user acquisition efficiency.

(Foreign Language) I think the second point is the -- it comes from our ability to enhance the platform's social , 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 platform, so that we believe that trend can continue and also with our new fan features such as hardcore fans and our products in fans community further strengthen the interaction relationship between our fans and the content generators (Foreign Language) In summary, I think we are benefiting from the ability to operating the hot trends or hot events that gives us the efficiency -- help us to improve the efficiency in user acquisition both for new users and our ability to recall our users. And on top of that, our community product was able to attract Big Vs from other platforms, even including those from live streaming platforms, so that to create a bigger platform for the Big Vs and the fans to interact.

(Foreign Language) As we indicated in the past for regulatory events, Weibo's platform feature is not limited to one particular area but for this year, in particular, in welcoming the National day for 70 years anniversary, entertainment industry inevitably was negatively impacted.

(Foreign Language) Well, our contents are not limited to the self-media. We have the vast majority official accounts available on our platform. So in a event like this, we are actually benefiting from the more constrained regulatory environment as our content will continued to be supplied from those accounts with the validity and with the more formal voice.

Gregory Zhao -- Barclays -- Analyst

Okay. Thank you. Very helpful.

Operator

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

Alicia Yap -- Citigroup -- Analyst

Hi. Good evening management. Thanks for taking my questions. My questions is related to the advertising budget and also Weibo competitive positioning. So could 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 toward just the 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 this be sustainable? Will Weibo see any threat in the future? Thank you.

Gaofei Wang -- Chief Executive Officer

(Foreign Language) So when we look at KA accounts growth rate for second quarter, we have to consider the tough comp due to World Cup related promotion in last year and that factor will also impact the growth rate of Q3 as well. As I indicated, part of the regulatory reason, some of the IP video shows has seen postponed on the video platform. These had a negative impact on certain cosmetic customers, their spending on our platform as well because their budgets largely have to be matched to the release schedule of the blockbuster IP programs.

(Foreign Language) If we break this further into the industry segment, our growth are largely depending 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 3C [Phonetic], our cellphone manufacturers. These are the ones we see slowed -- a quite considerable slowdown in terms of their spending for marketing dollar. (Foreign Language) So with large -- still the uncertainty resides in the macro and those key accounts, our focus has been shifted much more to our product competitiveness in the marketplace.

(Foreign Language) I think there are three areas we are focusing for our KA revenue growth starting from a product perspective. Started number one, it's an integral marketing effect with the performance and the branding, that's particularly true with FMCG and the e-commerce industry segments.

That's the area we are expanding beyond our traditional brand and advertising over pricing and we believe there's a good growth potential to taking on their performance related ad budget. (Foreign Language) With our strong inventory available, with our celebrity and our KoL we are leveraging that advantage with the brand marketing as we see brand marketing moving very quickly on the social needs. So that we want to make sure we're definitely taking advantage of this movement. (Foreign Language) As I indicated in the prepared remarks like Samsung [Phonetic] and even some of the cases we have done for our automobile industry will leverage our celebrity resources on the platform to take additional budgets out of these customers.

(Foreign Language) The other element, as I indicated, we are moving more aggressively to taking ad budget from regional brands. Historically, these brand's marketing focus were on the local TV station. Now we believe that's one of the other areas we see the growth potential. (Foreign Language) I think in summary, these three areas are the focus point for us to grow our key accounts and continue to enhance our competitive edge in the key accounts marketing.

Alicia Yap -- Citigroup -- Analyst

Thank you.

Operator

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

Bill Liu -- Goldman Sachs -- Analyst

Thank you management for taking my question. My question is on the SME advertising. So could you give us some updates on the strategies to grow the segment because [Phonetic] of the intensive 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, what is the -- any new initiative or strategic focus for rest of this year? Thank you.

Gaofei Wang -- Chief Executive Officer

(Foreign Language) Even though we have experienced better than expected SME revenue delivered in second quarter, we believe we still have -- we see a lot of potential for us, can do better. (Foreign Language) Put aside the ROI and ECPM, as I indicated ECPM rates have been relatively stable on a quarter-over-quarter basis. I think the issue -- the main issue resides on the demand side as we continue to see the weakness on that particular area and I think for us the issue to resolve it is to really try to raise our sell-through rate in the coming quarters. (Foreign Language) 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 two 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 algorithm.

(Foreign Language) I think in terms of the industry segment, particularly for education and gaming, we were less flexible in terms of the user acquisition strategy, that was reflected partially in our distributor policy type of thing. So we are definitely making some shift in that area in the coming quarters. (Foreign Language) On top of that, I think we are continue 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 further even better in the quarters to come. (Foreign Language) I think as in summary, what we are facing today in terms of SME customer sentiment, 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 in compared to the past.

Bill Liu -- Goldman Sachs -- Analyst

Thank you.

Sandra Zhang -- Investor Relations

This concludes our conference call today. Thank you for joining us. We'll see you next quarter.

Operator

[Operator Instructions]

Duration: 58 minutes

Call participants:

Sandra Zhang -- Investor Relations

Gaofei Wang -- Chief Executive Officer

Fei Cao -- Vice President, Finance

Gregory Zhao -- Barclays -- Analyst

Alicia Yap -- Citigroup -- Analyst

Bill Liu -- Goldman Sachs -- Analyst

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