WEIBO Corp Q4 FY2023 Earnings Call

Good day and thank you for standing by. Welcome to Weibo's Fourth Quarter and Fiscal Year 2023 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. Please be advised that today's conference is being recorded. I would now like to turn the call over to the first speaker today, Ms. Sandra Zhang from Weibo Corporation. Thank you. Please go ahead.

Thank you, operator. Welcome to Weibo's fourth quarter and full year 2023 earnings conference call. Joining me today are Chief Executive Officer, Gaofei Wang, and our Chief Financial Officer, Fei Cao. The conference call is also being broadcasted on the 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, which include 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 statement in this conference call and elsewhere. Further information regarding this and other risks is included in Weibo's Annual Report on Form 20-F and other filings with the SEC. All the information provided in this press release is occurring as of the date hereof. Weibo assumes no obligation to update such information except as required under applicable law. Additionally, I would like to remind you that our discussion today includes certain non-GAAP measures that exclude stock-based compensation and certain other expenses. We use non-GAAP financial measures to gain a better understanding of Weibo's comparative operating results, 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 payment 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 the management 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.

Thank you. Hello, everyone. Welcome to Weibo's fourth quarter and full year 2023 earnings conference call. On today's call, I'll share with you highlights on Weibo's product and monetization, review the progress made in 2023, and elaborate on our strategies for 2024. Starting from our financial performance in the fourth quarter. In the fourth quarter of 2023, our efforts to improve user acquisition and engagement of high-value users continued to pay off. In addition, we bolstered our initiatives to further recover the video content ecosystem, strengthen content operations, and enhance our ability to serve targeted marketing. As a result, despite the overall sluggish end market, our total revenue in the fourth quarter reached $463.7 million, an increase of 3% year-over-year and 5% quarter-over-quarter. Our total ad revenues reached $403.7 million, an increase of 3% year-over-year and 4% quarter-over-quarter. On a constant currency basis, both our total revenues and ad revenues in the fourth quarter would have increased 5% year-over-year. Our non-GAAP operating income in the fourth quarter reached $145.9 million, representing a non-GAAP operating margin of 31%. Turning to our full year financial performance. In 2023, due to uncertainties of the macro and industry environment, the recovery of ad demand was a bit volatile. It resulted in lower than expected annual marketing budget for some clients in key industries compared with our expectation at the beginning of the year, which weighed down the growth of our ad business. For the full year 2023, our total revenues reached $1.76 billion, a decrease of 4% year-over-year. Our total ad revenues reached $1.53 billion, a decrease of 4% year-over-year. On a constant currency basis, both of our total revenues and ad revenues would have increased 1% year-over-year. This year we focused on improving our product's core competitiveness and enhancing operating efficiency to navigate through challenges from the external environment. For the full year 2023, our non-GAAP operating income reached $592.1 million, representing a non-GAAP operating margin of 34%. On the user front, Weibo's MAUs reached 598 million and average daily users reached 257 million in the fourth quarter, adding approximately 11 million and 5 million users year-over-year, respectively. Next, let me elaborate our progress made on product operation and monetization in the fourth quarter and our key strategies for 2024. Looking at our strategy from 2023. In the first half of the year, we started to recover user traffic in the post-pandemic era in the second half of the year, while maintaining our core competitiveness in popular culture, entertainment, and sports. We strengthened the development of the vertical content ecosystem through traffic support for vertical content, which enhanced the competitiveness and health of Weibo's overall ecosystem. On the channel front, in the fourth quarter, we maintained cooperation with manufacturers to increase channel investment for the acquisition of high-value users through more accurate targeting capabilities. Our user engagement improved, which laid the foundation for monetization. On social attributes, in the fourth quarter, we continued to execute strategies focused on the development of content verticals. On one hand, we continued to optimize content structure for relationship-based feeds to reinforce the distribution of content from key verticals and recover the overall content ecosystem. On the other hand, we continued to enrich the ways vertical KOLs interact with their friends and improve their interaction efficiency. As a result, KOLs from vertical areas continued to gain more traffic and user interactions and became more willing to generate content. In 2023, the number of daily interactive users and interactions in the relationship-based feed continued to grow year-over-year. For Super Topic, we launched new functions for users to post and interact, boosting user engagement in the community. In particularly for the entertainment vertical, we further enhanced the Super Topic social attributes and interaction for users' in-depth discussion and content recreation in the entertainment sector, leveraging improvement of the overall sector. As a result, user engagement in the entertainment vertical increased significantly in 2023 versus 2022. The number of DAUs of Super Topic increased year-over-year and the number of users who post per day and interaction of the Super Topic increased over 20% year-over-year. On the content front, in the fourth quarter, on top of retaining the competitiveness of hot topics, entertainment, and other advantages in key IP-related verticals, we linked our traffic toward verticals to support the industry market. For example, we increased investment in digital, automobile, online games, fashion and beauty, and healthcare verticals to enhance industry partners' perception of the platform value and further enhance the competitiveness of our content ecosystem. On the IP-related content ecosystem, in the fourth quarter, for the entertainment vertical, we continued to boost the engagement and interaction of top celebrities and increased the discussion around their works to strengthen our competitiveness in the fans and entertainment work-related content ecosystem. In 2023, the traffic and interactions in the entertainment vertical increased year-over-year. In particular, top celebrity engagement and posts increased over 30% year-over-year, with a better environment for entertainment work production and release. The traffic around the promotion of entertainment work and discussion around these works have increased significantly year-over-year with total discussion increasing by more than 50% year-over-year. The traffic and discussion around TV series on Weibo reached record highs. In terms of hot trends, we encouraged national media to organize discussions of hot trends in the vertical area, facilitating media's hot trend coverage from social news to vertical hot trends to increase media engagement in vertical hot trends and stabilize user demand for consumption and discussion of social hot topics. On industry-related content verticals, we continued to invest more resources across the platform in the fourth quarter. First, we strengthened the traffic distribution of high-quality vertical content, increased the proportion of vertical content on the platform, and promoted the development of top KOLs in each content vertical. Second, we adjusted the product mechanism to enhance traffic support to vertical hot content that creates hot trend effects, improving the perception of industry-related hot trends. Third, we improved the operation of industry-related vertical topics and events, leveraging Weibo's advantages in cross-vertical operation to guide media and top cross-vertical KOLs to post and engage with vertical content. All these measures contributed to the continuous growth of the traffic and interactions in industry-related verticals compared with the third quarter. For example, since October, we have seen a surge in user interest in various respiratory diseases such as influenza and mycoplasma. We encouraged media accounts to actively post content of popular science and also promoted related content sharing from vertical KOLs from across verticals. As a result, the total consumption of related hot topics has exceeded 2 billion, attracting a large number of doctors to join and engage on Weibo. It has quickly increased Weibo's influence in the medical industry and established user habits of discovering, consuming, and discussing hot topics in the healthcare vertical on Weibo. Moving on to the monetization front. In the fourth quarter, thanks to the e-commerce shopping festivals, year-end promotion, and tailwinds from game license approvals, Weibo's ad revenues grew 3% year-over-year and 4% quarter-over-quarter, leveraging Weibo's strength in hot trend marketing. By industry, revenues from the automobile and handset sectors sustained solid year-over-year growth in the fourth quarter. The growth was mainly attributable to Weibo's differentiated advantage in content marketing for new product launch as well as favorable discussion light in the areas of digital technologies and new energy vehicles. In addition, the online games and healthcare industries booked double-digit growth year-over-year in the fourth quarter. As for the healthcare sector, we are pleased to see a steady growth trajectory of both our industry influence and monetization with a surge of user interest in the healthcare industry post the reopening. Our increased investment in the vertical content ecosystem of healthcare also gradually bore fruit. In terms of the online game industry, with tailwinds from game license approvals and better recognition of our content marketing solution among customers, we captured the opportunity to promote new blockbuster titles for key clients in the fourth quarter, delivering sustained year-over-year revenue growth. For example, in the fourth quarter, Tencent's Dream Star and NetEase Eggy Party spent heavily on Weibo for new game campaigns. With budget allocated mostly to hot trends and content marketing, we delivered strong branding effects, exceeding clients' expectations entertained by our unique content marketing and service capability of building market hype for new games. Ad revenues from the e-commerce sector also boosted year-over-year and quarter-over-quarter growth in the fourth quarter, thanks to the mega e-commerce shopping festivals. On the flip side, for the beauty and personal care industry, even with strong traffic support for content generation, top clients were still closing out inventory during the Double 11 shopping festival, resulting in continued budget shifts toward performance-based platforms. Therefore, the recovery pace of the beauty and personal care industry still fell short of our expectations, which has become the major drag for the overall ad growth in 2023. For one thing, driven by ad budget shifts from offline to online during the pandemic, revenue contributions from the beauty and personal care industry increased significantly in 2020 and 2021, creating a high base during that time. For another, since 2022, customers have been shifting their sales channels toward e-commerce live streaming platforms, leading to a decline in ad volume share of social media and traditional e-commerce platforms. Additionally, we also need to further bolster our investments to strengthen Weibo's competitiveness in the content vertical of beauty and personal care. We hope to resume positive ad growth in this sector this or next year with a further recovery of the content ecosystem and normalization in customers' sales channel adjustments. Looking back on 2023, we faced challenges from rapid shifts in user interest in the post-pandemic era. Namely, we saw a decline in content consumption demand for news and hot trends, while a surge in consumption demand for vertical content. In the meantime, the recovery pace of the overall consumer market also fell short of expectations, leading to a cut in brand ad budgets for certain customers. In light of the headwinds from content consumption and advertising demand sides, we focused on improving the platform's operating efficiency in 2023. We strengthened our competitiveness in hot trends and social products, further grew our user community and traffic, as well as enhanced the monetization value of the platform's traffic. This effort laid a solid foundation for us to promote vertical traffic and thus revitalize Weibo's company ecosystem and competitiveness. Overall speaking, although revenues from certain industries fell short of expectations and dragged the total revenue growth, we delivered decent operating profit, which further increased from last year, thanks to solid execution of our efficiency initiatives, leveraging improved operating efficiency, stable profitability and healthy cash flow further elevated our financial flexibility, giving us ample room to invest in the vertical content ecosystem and drive user growth and engagement. In view of the challenging competition landscape of vertical content, we will take gradual steps to restore our competitiveness of the vertical content ecosystem while focusing on solidifying our advantageous areas. It may take 2 to 3 years to drive up the traffic share of vertical content on the platform. In this way, we could further reinforce Weibo's market influence, achieve healthy development of the content ecosystem, and thus lay a solid foundation to enhance our monetization efficiency. In 2024, we will focus on growing our user community and engagement, strengthening the competitiveness of our content ecosystem, as well as further enhancing our operating efficiency. In light of the current market conditions, we strive to maintain steady revenue growth while improving overall efficiency simultaneously. On the operation front, we will beef up our efforts to reinforce the competitive edge of hot trends and IPs while revitalizing our vertical ecosystem. On the monetization front, we aim to optimize our content marketing and performance-based ad products. We believe the execution of these strategies will lay a solid foundation for our top-line recovery from the user, content, and monetization sides, enabling us to capture market opportunities once the macro-economy improves and brand ad demand increases. On the user and engagement front, in 2024, our product operation will focus on three aspects. First, we will continue to operate closely with strategic channel partners with a focus on improving high-value user acquisition and usage frequency. Second, we emphasize optimizing the structure of social products and further enhancing the recommendation efficiency of information feeds in the hope of driving user scale, social interactions, and engagement. Third, we'll refine the product vibe and user experience of hot trend products to reinforce the mindset and market influence of our key users. Meanwhile, we will also try to create more hot trend-based products, enabling users to discover more hot topics and trends, thus entering public discussions and further growing the user scale and engagement of hot trend products. On the content ecosystem, we will also highlight three aspects in 2024. First, we will continue to reinforce our leading position around the ecosystem of entertainment and sports events. In particular, as for the entertainment sector, we'll strengthen the celebrity followers ecosystem to increase user interactions and focus on strengthening our strategic cooperation with the promotion and distribution platform of movies, TV series, and variety shows. This will not only solidify the competitiveness of the entertainment work-based ecosystem but also drive platform traffic and user engagement. Taking the movie promotion during the 2024 Spring Festival as an example, leveraging our cooperation with movie IP holders around the hot trend operation of movie plots, celebrity followers interactions, and extended vertical topics, we are pleased to see a 50% increase in topic discussion year-over-year, giving us confidence in becoming a go-to platform for movie promotion this year. 2024 also marks the year of the Olympics. Our years of cultivation around the sports vertical will pay off with an opportunity to achieve new record highs in sports-related traffic and discussions. Second, we will continue to solidify our leading position around hot trends. We hope to see steady growth of society and media-related hot topics. The key is to better engage the media and top content creators in the distribution and discussion of hot topics around vertical trends, enabling the build-out of mega hot topics. These efforts would hopefully consolidate Weibo's market influence in the hot trend area and facilitate large-scale user acquisition. Third, we'll further strengthen the cultivation of the vertical ecosystem in key industries. To elaborate, we will grow the number and engagement of golden and orange verified accounts, boosting the discussion of vertical hot topics and thus reinforcing the synergy between the company ecosystem and monetization ecosystem, which forms a virtuous self-reinforcing cycle. Finally, on operating efficiency, we'll step up our efforts in enhancing our monetization competitiveness. We will continue to strengthen the recognition of Weibo's content and IP marketing among more industries and clients and thus improve our competitive edge in capturing clients' budgets. In terms of ad products, we'll standardize and scale up the sales of our content and IP marketing offerings. As for performance-based ads, we strive to improve our service capability around ad performance and content with a focus on optimizing evaluation of ad performance for key industries and top clients. For instance, the renowned down jacket brand Bosideng capitalized on its two product concepts, lightweight and thin, and reshaping classics in the winter campaign of 2023, leveraging a combination of celebrity endorsement and content marketing on Weibo. Bosideng deeply bonded with the hot topics around this brand ambassador Yang Zi, tapping into real-time winter-related trends such as temperature drops and white snow to firmly associate the brand with sustained ones in Bosideng. At the same time, Bosideng leveraged the celebrity's popularity to drive e-commerce traffic online while promoting its flagship store opening as a grand event offline. As a result, sales performance boosted dramatically in the fourth quarter, with sales volume increasing 40% year-over-year. This year, we will standardize our ad products and service processes to timely integrate popular IPs such as entertainment and sports events with our clients' campaign goals, which will further promote the monetization value of hot trends. On top of these initiatives to drive top-line growth, we will also continue to effectively discipline our cost expenses, strengthen the platform management, and further improve the overall operating efficiency of our platform. With that, let me turn the call over to Fei Cao for a financial review for the fourth quarter of 2023 and full-year financial results.

Thank you, Gaofei, and hello, everyone. Welcome to Weibo's fourth quarter and fiscal year 2023 earnings conference call. Let's start with user metrics. In December 2023, Weibo's MAUs and average DAUs reached 598 million and 257 million, respectively, representing an increase of 11 million and 5 million users on a year-over-year basis in 2023. Our user community and engagement remain healthy despite the reduction of pandemic-related traffic as well as the ongoing execution of investment strategies in Egypt and China. Turning to financials, as a reminder, my prepared remarks would focus on non-GAAP results. All monetary amounts are in US dollar terms and all the comparisons are on a year-on-year basis unless otherwise noted. We experienced challenges through our financials due to the volatility of foreign exchange rates throughout the year. Since our business primarily operates in China, while we report our financials in US dollars, our financial performance was affected by adverse currency movements. Let me now walk you through our financial highlights for the fourth quarter and fiscal year 2023. Weibo's fourth quarter 2023 net revenue was $463.7 million, an increase of 3%, or 5% on a constant currency basis. Operating income was $145.9 million, representing an operating margin of 31%. Net income attributable to Weibo reached $76.4 million and diluted EPS was $0.31. For the full year 2023, total revenue reached $1.76 billion, a decrease of 4%, or an increase of 1% on a constant currency basis. Operating income was $592.1 million, representing an operating margin of 34%. Net income attributable to Weibo reached $450.6 million and diluted EPS was $1.88. Operating cash flow for the full year 2023 reached $672.8 million, an increase of 19%. Let me give you more detail on fourth quarter and full year 2023 revenue performance. Weibo's advertising and marketing revenue for the fourth quarter 2023 was $403.7 million, an increase of 3%, or 5% on a constant currency basis. Mobile ad revenue was $379.2 million, contributing approximately 94% of total ad revenue. Full year 2023 advertising and marketing revenue reached $1.53 billion, a decrease of 4%, or an increase of 1% on a constant currency basis, with mobile ad revenue contributing 94% of total revenue. Regarding our Q4 performance front, consistent with our expectations, the advertising business booked solid growth overall with divergent performance across our pillar ad verticals. By industry, our largest three verticals were beauty products, FMCG, and e-commerce. In terms of growth, we are encouraged to see strong momentum in the handset sector throughout the year. The handset sector delivered double-digit growth on both a year-over-year and quarter-over-quarter basis as customers embraced our platform to reach higher-value users and build market cap. The e-commerce and game sectors also demonstrated a robust recovery trend with double-digit growth, leveraging favorable dynamics in the competitive landscape and the launch of blockbuster titles. The FMCG category continued on an ascending trajectory. The food and beverage sector faced a high comparable base due to the World Cup campaign season in 2022. Meanwhile, the cosmetic and personal care sector remained under pressure, suffering from soft sales and stringent marketing expense control among our multinational customers. Also, we continued to see ad budgets shifting towards platforms that serve the purpose of inventory clearance during the e-commerce season. Moving on to full year 2023 performance, due to macro uncertainties and weak consumption, the recovery pace of our advertising business in 2023 proved to be challenging. On a constant currency basis, our advertising and marketing revenue increased 1% versus 2022. By industry, our largest three verticals were FMCG, beauty products, and e-commerce. With respect to growth, beauty products were the largest contributor to year-over-year growth, followed by e-commerce and automobiles among major categories. However, discretionary consumption categories such as cosmetics and personal care, luxury, and apparel faced broad-based challenges from demand trends for ad products. We have also experienced a decline in revenue share for social display ads and topics. In 2023, in light of tepid advertising demand, we focused on revitalizing the content ecosystem with high monetization potential such as beauty products and automobiles. This effort has enabled us to further strengthen our content marketing offerings and enhance our market differentiation. Ad revenues from Alibaba for the fourth quarter were $44.9 million, an increase of 6%, or 8% on a constant currency basis, thanks to modest recovery in the consumption market and intensified competition during the mega shopping festival. Full year ad revenues from Alibaba were $111.6 million, an increase of 4%, or 10% on a constant currency basis, consistent with Alibaba's moderate increase in marketing budget. Before turning to VAS segment, let me share some preliminary insights on the market outlook entering 2024. With the economy in a state of transition and geopolitical uncertainty in 2024, the macro conditions and consumption sentiments are turning harder to predict. Despite limited visibility of demand due to macro uncertainties, we are cautiously optimistic about the further recovery of our advertising business in 2024. We hope to leverage the tailwinds in Weibo's competitive sectors, as well as a series of mega sports events. Our team will enhance sales execution to unlock the long-term opportunities underpinned by our unique value proposition and diversified content ecosystem. Value-added service (VAS) revenue was $59.9 million in the fourth quarter, an increase of 4%, or 6% on a constant currency basis, mainly due to higher revenue contribution from game-related business. Full year 2023 VAS revenue decreased 6%, or 1% on a constant currency basis, to $225.8 million. Turning to costs and expenses, total costs and expenses for the fourth quarter were $317.8 million, an increase of 7%, mainly attributable to higher G&A expenses. The increase in G&A expenses was primarily due to lower G&A expenses booked in the fourth quarter of 2022, mainly related to the reversal of compensation expenses for Jiamian Technology based on the contingent payment arrangement between us. Full year costs and expenses totaled $1.17 billion, a decrease of 5%, primarily attributable to a favorable foreign exchange impact on the reported numbers, as well as a decrease in personnel-related costs. This decrease was partially offset by an increase in G&A expenses, mainly related to the recognition of compensation expenses for Jiamian Technology as mentioned above. Operating income in the fourth quarter was $145.9 million, representing an operating margin of 31%, compared to 34% in the same period last year. Operating income for the full year 2023 was $592.1 million, representing an operating margin of 34%, compared to 33% in 2022. Turning to income tax and GAAP measures, the income tax expense for the fourth quarter was $72.6 million compared to an income tax benefit of $18.7 million last year. The increase was primarily due to two factors. First, we booked a reversal of tax liabilities recognized in the fourth quarter of 2022 related to uncertain tax positions. Second, we paid and accrued withholding tax related to earnings remittance from the wholly-foreign owned enterprise (WFOE) to Weibo Hong Kong Limited. The earnings distribution from onshore to offshore will fund our need for U.S. dollars in business operations and payments of dividends and debt, etc. Full year income tax expenses were $145.3 million compared to $30.3 million last year, mainly resulting from the increase of tax expenses in the fourth quarter. Net income attributable to Weibo in the fourth quarter was $76.4 million, representing a net margin of 16% compared to 30% last year. This shift is primarily due to the aforementioned impact from income tax. Net income for the full year 2023 was $450.6 million, representing a net margin of 26% compared to 29% last year. Turning to our balance sheet and cash flow items, as of December 31, 2023, Weibo's cash, cash equivalents, and short-term investments totaled $3.23 billion compared to $3.17 billion as of December 31, 2022. In the fourth quarter, cash provided by operating activities was $218.2 million, capital expenditures totaled $7.5 million, and depreciation and amortization expenses amounted to $14.7 million. On a full-year basis, cash provided by operating activities was $672.8 million compared to $564.1 million in 2022. Capital expenditures totaled $36.8 million, and depreciation and amortization expenses amounted to $58.5 million. Before turning to the Q&A session, I would like to let you know that we completed an offering of USD 330 million convertible bond in December last year. The bond is due in 2030 with an annual coupon rate of 1.375%. We plan to use the net proceeds from the note offering to refinance a portion of the outstanding 3.5% senior note due in July this year. As part of the convertible note issuance, we will also effectively keep a strong cash position in US dollars, which provides more financial flexibility in capital allocation in the future. Lastly, given our healthy profitability and cash flow generation, we are pleased to announce that our Board of Directors has approved a special cash dividend of USD 0.82 per ordinary share for ADS to our shareholders. The aggregate amount of the dividend will be approximately USD 200 million, with the payment date expected to be in May. Looking ahead, we remain highly committed to embracing long-term growth opportunities while generating more returns to shareholders and boosting market confidence. With that, let me now turn the call over to the operator for the Q&A session.

Our first question comes from Timothy Zhao from Goldman Sachs.

My question is regarding our advertising business. Could management elaborate more on your outlook for the advertising revenue growth for this year, including the first quarter? And specifically, regarding the advertising products, what is our key strategy for this year?

Thank you for this question. So first of all, because in 2023, for many different quarters, we had a lot of uncertainties for providing these particular expectations. So we remain cautious and prudent in giving expectations for the whole year of 2024. So in Q1, we do see a recovery of almost all the industries. However, still, there are a lot of uncertainties and challenges relating to the consumption market as a whole. Okay. And also in terms of the overall demand in 2024, still we have seen some certainties for some industries, for instance, in terms of gaming and sports, for the Olympics, which will take place in July and the beginning of August. This has boosted some of the advertisement budgets for the consumption market, for instance, from food and beverages, as well as apparel and footwear. So of course, in 2022, we actually had a very high base because of the Asian Games and the World Cup. But still, we expect to have a better second half of the year in 2024 than the first half. And also, in terms of gaming, we do see a lot of uncertainties. For instance, with the booming of the granting of licenses to game developers, we believe we can leverage our advantages in terms of content marketing, and we would like to leverage this advantage and help to explore many new games. So in 2024, we expect to have a better gaming industry than that of 2023. Okay. And also, in 2022, we saw the enhancement of our competitiveness, and the percentage of the ad budget against the total budget of our customers is also growing. But still in 2024, whether those industries will enjoy the same momentum in Weibo remains uncertain and challenging. For instance, take the examples of the handset and automotive industries. In 2023, we had a very good growth in terms of the handset industry, which was double-digit. And we saw an increase in the total ad budget percentage allocated to Weibo in 2023. However, in 2024, we remain cautious about maintaining the same momentum of the growth for the handset industry versus that of 2022. Still, we have observed a better-than-expected shipment of the handset industry in Q1. However, for the whole year of 2024, there is a big uncertainty about this. Regarding the automotive industry, we have gained a natural advantage in promoting new energy vehicles. However, due to the price war and a decrease in budgets for ICE vehicle ads, we found it quite challenging to maintain the same growth momentum in the automotive industry compared to last year. However, overall speaking, we are still maintaining good momentum and high competitiveness in attracting a larger ad budget from our customers. Lastly, I would like to share some insights into the beauty and cosmetic products industry. In 2022 and 2023, we faced challenges because of the industry itself. We had a very good year in 2021 and 2022, but there are a lot of headwinds in the cosmetics and beauty products industries, such as heightened competition and price wars engaged by almost all the brands. They have decreased their allocation of the ad budget overall. You can also see a shift of the budget from traditional e-commerce to live streaming platforms, which brought a lot of pressure regarding budget allocation for brand-based performance, brand-based ads, or e-commerce-based ads. We still hope for a stabilized performance in the beauty and cosmetics industry and a more optimized allocation of the ad budget. However, in Q1, it was less than expected and won’t optimize as well. For international brands, they are a bit far from a full recovery. Meanwhile, we observe the recovery of domestic brands, but it is not yet the time for them to increase their ad budgets. Overall speaking, we wish to have a stable vertical like the cosmetics and beauty products. However, it is still one of the most challenging sectors in our portfolio. Lastly, about our overall strategy for this year, as we have stated in our prepared script, our focus will still be on emphasizing IP hot trends and content marketing so that we can increase our competitiveness and budgets from our customers.

The next question comes from the line of Thomas Chong from Jefferies.

My question is about our strategies in 2024 with regard to users and our content ecosystem. Also, how should we consider our AIGC strategies?

For this question, first, let me talk to you about the overall user strategy in 2024. We will maintain the same budget for marketing activities as in 2023. In 2023, we noticed a decrease in our total shipments for the handset industry, but we still achieved a net gain of MAUs of over 10 million and a net gain of DAUs of over 5 million due to a deep strategic collaboration with handset makers, which allowed us to have a very low user acquisition cost. Overall speaking, by focusing on entertainment and hot trends, we retained a strong position in attracting users from outside of Weibo. In 2024, we expect a similar budget allocation to the marketing area compared to 2023. We see good recovery in social hot trends and increased performance during the Chinese New Year period. Consequently, we are confident of achieving significant user growth and scale in 2024 compared to 2023. However, the internal challenges we aim to address include the shift of traffic towards verticals. We believe that by increasing the traffic allocated to verticals, we can enhance user stickiness and improve our monetization efficiency. Before COVID, nearly 58% of our traffic was allocated to verticals. However, during the COVID period, this decreased to around 47% to 48%. By the end of 2022, we made progress in recovering it, but it’s still around 50%. Over the next 2 to 3 years, we aim to increase vertical traffic to 60% or more to enhance user stickiness and overall competitiveness. Regarding AIGC, we have commented a few times in past announcements. For 2024, we aim to incorporate large language models and apply them in various ways. For example, we will enhance interactions between new fans and KOLs using AI assistants. Currently, approximately 5% to 10% of the overall interactions between followers and KOLs are supported by AI assistants. Additionally, last year, we focused on the verticals in beauty and cosmetic products, facilitating the generation and production of content in this area. This year, we plan to further expand AIGC applications to four to five different verticals. Last year, 8% of the content in the cosmetics and beauty vertical was generated by AI tools, and this year we aim to increase that to around 10% to 15%. We still have challenges ahead, and for other areas, including AI robots and various commercial applications using AI, we are currently in the experimental phase without specific targets or figures to share at this time.

Our last question comes from the line of Xueqing Zhang from CICC.

We noticed that the company announced a special dividend this quarter. With the capital allocation and shareholder return plan this year, can management share more on the share buyback and dividend plans for the future?

Xueqing, thank you for your question. This is Fei. As mentioned in my prepared remarks, Weibo maintained decent profitability and relatively strong capability to generate operating cash flows. In 2023, our non-GAAP operating income reached $592 million, representing a non-GAAP operating margin of 34%. We generated operating cash flow of approximately $673 million in 2023, representing a year-over-year increase of 19%. So if you can remember last year, when we distributed a special cash dividend for the first time last May, we talked about certain principles we would adhere to in the use of our cash. First, we prioritize supporting business growth and strengthening our platform's competitive advantages such as investing in the content ecosystem, vertical areas, AIGC, and any opportunities closely related to our business. In addition to investing in our own business development, we will ensure shareholder returns. Our Board of Directors has approved the distribution of another $200 million special cash dividend, following the USD 200 million cash dividend last year. Going forward, we expect to continue paying dividends to our shareholders and gradually formulate a new cash dividend distribution policy. The Board will primarily decide on the dividend amount based on our company's profit performance in the previous fiscal year, while also considering factors like cash flow, financial condition, and capital requirements. Therefore, looking ahead, we will explore various ways to reward our investors and shareholders, including dividend payouts and stock repurchases. These measures will be carefully considered in line with our core objectives and are subject to Board approval. We will communicate the progress with the market and our investors promptly. I hope this addresses your question.

There are no further questions at this time. I would like to hand the call back to management for closing remarks.

Thank you all for joining us, and we will see you next time.

That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.