WEIBO Corp Q3 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to the Weibo Reports Third Quarter 2023 Financial Results Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Sandra Zhang. Please go ahead.

Thank you, operator. Welcome to Weibo’s Third Quarter 2023 Earnings Conference Call. Joining us today are our Chief Executive Officer, Gaofei Wang; and our Chief Financial Officer, Fei Cao. The conference call is also being broadcast on the Internet and is available through Weibo’s IR website. Before the management remarks, I would like to read you the safe harbor statements 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 laws. 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 a better understanding of Weibo’s comparative operating performance and 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 non-recurring in nature or not indicators of our core operating results and outlook. Please refer to our press release for more information about our non-GAAP measures. Following management’s prepared remarks, we will open the lines for a brief Q&A session. With that, let me turn over the call to our CEO, Gaofei Wang.

Thank you. Hello, everyone. Welcome to Weibo’s third quarter 2023 earnings conference call. Today, I will share with you highlights on Weibo’s product, operation, and monetization in the third quarter of 2023. On the user front, Weibo’s monthly active users reached 605 million, and average daily active users reached 260 million in the third quarter, adding approximately 21 million and 8 million users year-over-year, respectively. Our monetization from the supply side in the third quarter benefited from promotions of popular TV series and movies during the summer vacation. Our user engagement continues to improve, and overall traffic on Weibo reached peak levels this year in July and August, providing sufficient ad inventories on the platform. From the demand side, a few factors negatively impacted ad revenue growth. First, the macro economy and consumption fell short of expectations. Secondly, a few unexpected adverse factors in late August negatively impacted some clients’ budgets. Thirdly, in Q3 last year, after the pandemic lockdown, advertisers intensively launched new products and increased ad placements. Due to these factors, our ad revenues in Q3 picked up modestly year-over-year, with ad performance in July declining and the performance of August and September recovering month-over-month. In Q3, our total revenues reached USD 442.2 million, a decrease of 3% year-over-year and flat quarter-over-quarter. On a constant currency basis, our total revenues would have increased 2% year-over-year and 3% quarter-over-quarter. Our total ad revenues reached USD 389.3 million, a decrease of 1%, or an increase of 3% on a constant currency basis. 95% of our ad revenues came from mobile. This year, we will continue to focus on improving operating efficiency. Our non-GAAP operating income reached USD 163.9 million, representing a non-GAAP operating margin of 37%. Next, I will share with you our progress in product operation and monetization in the third quarter. This year, on product operation, we shifted our focus from hot topics around the pandemic in the past 3 years to traffic recovery of content verticals, reinforcing the development of content ecosystem for vertical areas, aiming to improve user engagement on the platform and drive monetization value for our clients. On the channel front, leveraging the increased scale of hot trends on Weibo in Q3, we will continue to collaborate with handset manufacturers and moderately step up our channel investments, thereby improving the scale of high-value users acquired through channels and the conversion rate of these high-value users to DAUs. In the third quarter, the average DAUs acquired from handset manufacturers achieved double-digit growth quarter-over-quarter, particularly with the promotion on iOS channels. The proportion of high Apple users from Apple handsets reached 46% of our total DAUs, which also boosted user engagement on Weibo. On social attributes, in the first half of the year, we completed the structure upgrade of social network products, which improved the distribution efficiency of relationship-based feeds and continuously increased the average daily refreshments per user. We pay more attention to the development of a vertical content ecosystem, and the interaction efficiency between KOLs and their followers improved in Q3 for relationship-based feeds. It motivated engagement of social content creators and thereby improved users’ social stickiness. To elaborate, on one hand, we upgraded the algorithm model to drive user interaction and effectively divert more traffic to KOLs and content with more fan interactions. On the other hand, we improved the positive feedback mechanism for KOL activities, which means rewarding KOLs in real time based on traffic and on an incentive system to encourage their content generation and fan interaction frequency. Our efforts in these two aspects not only led to a quarter-over-quarter increase in the number of average daily engaged users and engagement efficiency of relationship-based feeds but also boosted KOLs content generation in the third quarter. For interest-based feeds, we have also been refining user interaction efficiency and upgraded recommendation algorithms by modifying content tags and user demographics. As a result, the consumption of interest-based feeds and video feeds per user grew 20% year-over-year. On the content front, this year, we mainly focused on two aspects of our vertical content operation. First, we further solidified Weibo’s advantage in the IP-related content ecosystem such as social topics, entertainment, ACGN, and sports to continue to improve our competitiveness in the user acquisition market. Secondly, we allocated incremental traffic support to certain content verticals with strong commercial attributes to better support the industry market such as digital products, automobiles, fashion and beauty, healthcare verticals, and other interest-based verticals that will drive user engagement such as food and humor verticals. Regarding Weibo’s IP-related content ecosystem, driven by numerous TV series and movies in summer and hot topics around the Asian Games, the traffic and user engagement of Weibo’s IP-related content continues to increase quarter-over-quarter. In the entertainment vertical, engagement with celebrities and KOLs was stimulated by hot topics related to TV series, variety shows, and movies. In Q3, the average daily traffic, the number of interactive users, and total interactions grew year-over-year and achieved double-digit growth quarter-over-quarter. For the ACGN vertical, as its peak season in summer for game developers to launch and promote new games, the traffic and user engagement for this vertical continue to grow quarter-over-quarter. For the sports vertical, thanks to our strategic cooperation with the Asian Games Organizing Committee, the hot contents of the Asian Games were fully covered by mainstream media, and over 600 star athletes shared their competition experiences on Weibo, which led to the total discussion of the Asian Games exceeding 100 million times on Weibo. For the commercial vertical content area, traffic from digital products and automobiles sustained solid growth momentum in the past 3 years, leveraging robust content and monetization ecosystem reviews as we focused on increasing the number and engagement of professional accounts in these verticals and strengthening clients’ mindset for new product releases. In this quarter, both traffic and user interactions generated from the digital product vertical booked double-digit growth year-over-year and quarter-over-quarter as we tapped into industry health trends such as the phone launches of Xiaomi and Huawei and Weibo Mobile Photography year. In the second half of the year, we expanded this system to other synergistic verticals with the client marketing ecosystem such as beauty, apparel, healthcare, etc., focusing on inviting people with industry influence and professional KOLs to join Weibo and driving their engagement. Leveraging Weibo’s strengths in operation around hot topics, we have built Weibo into the go-to platform for the growth of professional KOLs and distribution and discussion of industry hot topics, thus enhancing clients’ recognition of Weibo and further reinforcing our market competitiveness. At present, we are pleased with the early results in the healthcare vertical. We have expanded partnerships with industry associations and increased the number and engagement of professional doctors on the platform and collaborated with media and top accounts across views to elevate the influence of medical professional content. As a result, user engagement and traffic from professional doctors grew significantly year-over-year, which also supported the sustainable development of healthcare clients in Weibo’s marketing ecosystem. For top content creators, we focus on selecting more top KOLs with higher influence and social value and offer support to them in terms of traffic, operation, and monetization, aiming to build a healthier ecosystem. As such, we introduced the Golden V badge for influential content creators in the second quarter and the Orange V badge for high-quality content creators in the third quarter. Since then, apart from traffic support, we also focused on enhancing the monetization capabilities of the Golden V and Orange V accounts, so they could obtain business recommendations more easily, and high-quality commercial content stands a better chance of traffic support. In the third quarter, the Golden and Orange V accounts generated a significantly higher proportion of all ad revenue derived from our We tags system, with income to these accounts ramped up by 50% year-over-year, which further boosted their engagement. Additionally, the scale of average daily posts, average daily interactive users, and interaction of the Golden V and Orange V accounts achieved double-digit growth quarter-over-quarter. We will adhere to this direction in the future and continue to facilitate the synergy between vertical KOLs and clients on the monetization front and thus empower more accounts with original content and social value to earn income on Weibo and better support a business ecosystem. Moving on to monetization, in the second quarter, driven by the Labor Day holiday and e-commerce festivals, we were encouraged to see pent-up consumption demand released to the market, leading to a broad-based ad recovery across verticals. Nonetheless, the recovery pace of the overall consumer market fell short of expectations for the full year. Customers from certain sectors remained cautious and hesitated towards market uncertainties, considering the soft consumption environment and sentiment. In the third quarter, we saw volatility of ad budget from Weibo’s key sectors, with a notable pullback of ad spend in July versus June. That said, benefiting from advantages in-house IP and new product marketing, we highlighted Weibo’s core competitiveness in the ad market, which resulted in a gradual ad recovery in August and September with month-over-month growth of over 20%, respectively. By industries, with further resumption of online and offline entertainment activities and sports events, we are encouraged to see numerous blockbuster IP conferences widely distributed and discussed on Weibo in the third quarter, especially in the areas of entertainment and sports. As such, we will continue to optimize our monetization product system and marketing model. To elaborate, we’ll leverage Weibo’s hot IP traffic and head discussion to show the combo of organic hot topics and marketing content to users. This approach enabled us to better fulfill customers’ brand exposure campaign goals and also built up our monetization efficiency around hot trends. As a result, ad revenue generated from the food and beverage and entertainment sectors demonstrated notable recovery trends, both delivering double-digit growth year-over-year in the third quarter. Moreover, the digital product sector continued to outperform in the third quarter with over 60% year-over-year growth in revenue, mainly thanks to the synergy between content and monetization ecosystem. Weibo has become the go-to platform for new products or brand launches. As mentioned before, we also beefed up our operation efforts in these business verticals. For example, the healthcare industry is on the trajectory of steady growth, with ad revenue maintaining double-digit growth year-over-year in the third quarter. We are also encouraged to see a greater quantity and diversity of customers in the healthcare sector, from performance-oriented aesthetic medical institutions originally to various kinds of clients across upstream equipment manufacturers, pharmaceutical companies, healthcare platforms, etc., all campaigning on Weibo with a growing trend. Finally, let me share some color on the beauty and personal care, as well as online gaming sectors. This year, the beauty and personal care industry has experienced twists and turns in its overall recovery pace, which was negatively impacted by a choppy brand marketing environment. We saw customers cut back investments in new products due to headwinds from their own operations. In response to such marketing environments on the demand side, we focused on capturing opportunities brought by hot topic traffic related to celebrities during summer vacation and strengthening Weibo’s competitive edge around celebrity marketing. Consequently, we effectively solidified ad wallets as the overall beauty and personal care sector booked sequential growth in the third quarter. As for the gaming industry, with normalization in game license approval, we expanded the coverage of new games and built more partnerships with key customers on the content marketing front. We not only strengthened the content ecosystem and hot topic operations during the public testing period of new games but also reinforced the routine build-up of the content ecosystem and optimized technology to improve ad performance of game clients for existing blockbuster titles. In the third quarter, driven by the summer vacation peak season and anniversary celebrations, ad revenue from the gaming industry booked double-digit growth from the second quarter. With that, let me turn the call over to Fei Cao for a financial review.

Thank you, Gaofei, and hello, everyone. Welcome to Weibo’s third quarter 2023 earnings conference call. Let’s start with user metrics. In September 2023, Weibo’s MAU crossed the 600 million milestone, reaching 605 million, and average DAU reached 260 million, representing a net addition of 21 million and 8 million users on a year-on-year basis, respectively. Turning to financials. As a reminder, my prepared remarks will focus on non-GAAP results. All monetary amounts are in US dollar terms, and all comparisons are on a year-over-year basis unless otherwise noted. We continued to experience headwinds to our financials due to the volatility of foreign exchange rates this quarter since our business primarily operates in China. While we report our financials in US dollars, our financial performance was affected by adverse currency movements. Now, let me walk you through our financial highlights for the third quarter 2023. Weibo’s third quarter 2023 net revenues were $442.2 million, a decrease of 3%, or an increase of 2% on a constant currency basis. Operating income was $163.9 million, representing an operating margin of 37%. Net income attributable to Weibo reached $136.6 million, up 15%, or 17% on a constant currency basis, representing a net margin of 31%. Diluted EPS was $0.57 compared to $0.50 last year. Let me give you more detailed color on the third quarter 2023 revenue performance. Weibo’s advertising and marketing revenues for the third quarter 2023 were $389.3 million, a decrease of 1%, or an increase of 3% on a constant currency basis, with a relatively soft July while accelerated growth in August and September. Mobile ad revenues were $368.9 million, contributing approximately 95% of total ad revenues. In terms of growth, we are encouraged to see strong momentum from the handset, entertainment, and online services sectors as the largest contributors to top-line growth. For the handset sector, our years of cultivation around the content ecosystem in the first three verticals continued to pay off, enabling handset manufacturers to target high-value users and build a market hub during high-end product launches. We also benefited from solid traffic performance built upon the blockbuster effect during the summer vacation, leading to further ad recovery from the entertainment sector and online platforms. On the flip side, the automobile and luxury sectors showed weakness this quarter, reflecting the seasonal pullback post an eventful first half of the year. The ad products promoted feed ad was the largest, followed by social display on the topic and search. Ad revenues from Alibaba for the third quarter were $21.7 million, an increase of 44% or 50% on a constant currency basis off a relatively low base, driven by incremental ad spend on brand exposure, seasonal shopping festivals as well as the Asian Games. Before turning to the VAS segment, let me share preliminary color on the trends entering the fourth quarter of 2023. On the upside, the advertising market continued to demonstrate a bottoming-off trend post a slip in July, in line with the macro and consumption data trajectory. We hope to close this year with further recovery of our ad business in the fourth quarter, benefiting from opportunities brought by the Mangafest e-commerce festival. That said, we may have to wait a while for a turning point of consumption sentiment, especially in certain discretionary categories to pick up in light of current macroeconomic conditions. Value-added service revenues were $52.9 million in the third quarter, a decrease of 12% or 7% on a constant currency basis, primarily due to a decrease in game-related revenues. Turning to costs and expenses. Total costs and expenses for the third quarter were $278.3 million, a decrease of 5%. Operating income in the third quarter was $163.9 million, representing an operating margin of 37% compared to 36% in the same period last year. Turning to income tax under GAAP measure. Income tax expense for the third quarter was $25.4 million compared to $19.8 million last year. Net income attributable to Weibo in the third quarter increased 15% or 17% on a constant currency basis to $136.6 million, representing a net margin of 31% compared to 26% in the same period last year. Turning to our balance sheet and cash flow items. As of September 30, 2023, Weibo’s cash, cash equivalents, and short-term investments totaled $2.77 billion. In the third quarter, cash provided by operating activities was $131.6 million, capital expenditures totaled $7.8 million and depreciation and amortization expenses amounted to $13.9 million. With that, let me now turn the call over to the operator for the Q&A session.

Your first question comes from Miranda Zhuang from Bank of America.

So, can management provide more details on the recent ad business recovery in the fourth quarter, especially given we have the Double 11 e-commerce promotions? And then how will the company increase the competitiveness of the ad business?

All right. Thanks for the question. First of all, as we have already stated, in terms of the Q3 performance of the advertising performance. So in the third quarter, advertising revenue increased on the basis of the renminbi by 3% year-on-year and also quarter-on-quarter, which is actually basically in line with our expectations. And also, this was primarily due to the concentrated release of consumer demand and advertising placement requirements during the e-commerce event on 618. After that, we’ve been seeing a quite weak performance during July and August, but a much better performance in August and September. Let me share some colors on the Q4 expectations. For the Double 11 shopping festival, we’ve been seeing a very good trend. For instance, in Q3, we got over 50% of growth because of the Asian Games by Alibaba. In Q4, we’ve been seeing the activation of ad placements by various e-commerce platforms like the Double 11 and Double 12 shopping festivals. We expect a year-on-year growth for the Double 11 and Double 12 e-commerce events, especially for e-commerce, including various brands and platforms. In the second half of this year, we had a very good momentum of growth for verticals like automotive, digital products, food and beverages, as well as healthcare as we have stated. However, in the second half, we’ve been seeing a slowdown in sales for both ICE and electric vehicles. While the ad revenue from electric vehicles is increasing, the ad revenue for ICE vehicles is decreasing. As a result, we expect lower performance in the second half of the year in terms of ad revenue from the automotive industry than the first half. In the first half of the year, we experienced some challenging verticals, such as fashion, beauty products, and gaming. However, the gaming industry returned to positive growth in Q3 due to new games and optimizations. Therefore, we expect continued momentum in Q4 for the gaming industry. As for the beauty and cosmetics industry, we anticipate a year-on-year decrease due to a decrease in operational effectiveness.

Your next question comes from the line of Daisy Chen from Haitong International.

I’ll translate myself. My question is about the real name display rule. We have noticed that many social media platforms in China, including Weibo, have recently announced that they will display the real names of the online influencers on their front account pages. So about this, I would like to ask the management what is the progress of Weibo’s real name display work of those display? And how we should evaluate the impact of real name rules on Weibo’s content ecosystem and user activity?

So for this question, since the birth of Weibo, we’ve been emphasizing the real name registration mechanism. I don’t believe that this is actually kind of a new rule or regulation for Weibo. If you want to be identified as a We account, normally you have to provide a real name and other relevant information to facilitate this accreditation process. Weibo actually established this when we entered this market to solve the issue of trust. However, in the future, we noticed the emergence of many different social platforms, and due to the requirements of personal and privacy information protection, this has become less stringent than before. Still, we perform the regulation of the front-end real name registration. For instance, if you want to apply for certification of your account, you need to provide your name, position, and company name. This is the real name registration process. For the current round of real name registration driven by new regulations, the primary purpose is to emphasize the authoritativeness and responsibilities that should be shouldered by top-notch We-media accounts so that we can facilitate and lead the creation of a more harmonious Internet environment. The impact of this round of regulations is pretty much limited, only affecting 5 to 6 different areas. Over 40% of major We accounts already had real name registration realized before. Thus the impact for us should be limited. This round of real name registration is not compulsory and will be carried out in different phases. Accounts choosing not to follow this process may experience impacts on traffic and certain revenues. This round started around the 10th of October. In the short term, it may generate some impact and limitation in traffic and other areas, but in the longer run, I believe it will create a more trustworthy environment with more trusted public information.

Your next question comes from the line of Timothy Zhao from Goldman Sachs.

I have two questions. First is regarding the progress in building the vertical ecosystem. Could management elaborate more on what is the Weibo progress so far and how does that affect your monetization capabilities? And secondly, it’s regarding AIGC applications. I think we discussed this last time, but I was just wondering if there are any updates, especially regarding content generation and also the efficiency improvement in your monetization capabilities.

For this particular question, we have emphasized Weibo’s strategy in prior earnings report sessions, particularly regarding the building of the vertical ecosystem. After COVID, we focused on establishing an IP ecosystem, targeting areas that attract significant attention from society, such as hot topics and the entertainment and culture sectors. We saw growth in this vertical ecosystem even during COVID. Traffic from IP ecosystems initially accounted for around 40% to 60% of Weibo's total traffic and exhibited stable growth. However, we would like to change our strategy after COVID to reduce our reliance on the IP ecosystem, focusing more on other vertical industries like cosmetics, beauty, digital products, and automobiles, since user interaction and stickiness are better in those verticals. So far, we are observing good recovery and growth in traffic in Q3 and expect continued improvement in the second half of the year. For example, the cosmetics and beauty vertical saw over 50% growth quarter-over-quarter, while digital products and healthcare recorded significant expansion as well. Nevertheless, we recognize differing recovery speeds across verticals; some have seen traffic recovery, but not the KOL ecosystem. We still have work to do in the cosmetics and beauty sectors, which may take another two quarters for full recovery. Regarding AIGC, we aim to continuously focus on collecting data through AIGC, as it helps bloggers generate content more efficiently and with higher quality. In Q3, we applied a large language model in different verticals to improve content generation efficiency. For instance, in the fashion, cosmetics, and gaming industries, AIGC facilitated bloggers in generating over 5,000 pieces of information daily, with a 50% better interactive rate and user stickiness compared to traditional content. In the future, we plan to apply AIGC extensively to other verticals as well.

Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.