WB Q1 2021 Earnings Call

Operator: Good day and thank you for standing by. Welcome to Weibo's First Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Ms. Sandra Zhang with Weibo's IR. Thank you. Please go ahead, ma'am.

Sandra Zhang: Thank you, operator. Welcome to Weibo's first quarter 2021 earnings conference call. During today, our 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 will 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'd like to remind you that our discussion today includes certain non-GAAP measures, which excludes 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 excludes certain expenses, gains or losses, and other items that are not expected to result in future cash payments or are non-recurring in nature or are not indicative of our core operating results and our outlook. Please refer to our press release for more information about our non-GAAP measures. Following 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.

Gaofei Wang: [Foreign Language] Thank you. Hello everyone and welcome to Weibo's first quarter 2021 earnings conference call. [Foreign Language] On today's call, I'll share with you highlighting Weibo's useful product and monetization in the first quarter of 2021. [Foreign Language] On the user front, Weibo's MAU reached 530 million and average DAU reached 230 million in March 2021 and 94% of Weibo's MAU came from mobile. [Foreign Language] On the monetization front, in the first quarter of 2021, our revenue increase of 43% year-over-year to 458.9 million, nearly set to the further recovery of market demand and the optimization of our competitive strategy for key industries. Our advertising and marketing revenue increased 42% year-over-year to 390 million with 92% of our ad revenue coming from mobile. Our non-GAAP operating income in the first quarter reached 137.5 million. [Foreign Language] Next, let me elaborate on the progress we made in the area of product and monetization in the first quarter. [Foreign Language] On the product front, since the start of 2021, we further enhanced Weibo's differentiated competitiveness in key features such as cultural and social functions coupled with effective channel strategies. We have further improved our user engagement concurrently to beef up our investment in video products to strengthen users mindset of using Weibo for video consumption, so as to enhance our product competitiveness. [Foreign Language] On the channel front, we set up our channel investment with a focus on improving user engagement allowing to Weibo's competitive advantage in user acquisition costs, while strengthening the synergy between channel investment and subsequent content consumption and thereby improving user engagement and retention. In the first quarter, we extended the channels and improved the content recommendation efficiency and the consumption experience of acquired users by focusing on algorithm optimization. Moving further, we will continue to improve user acquisition efficiency while focusing on increasing user retention, content consumption, and monetization efficiencies so as to improve our active user acquisition. [Foreign Language] On the product front, I would like to elaborate on key initiative on Weibo's information feed and video. On information feed, our objective in 2021 is to enhance people's key social features and the competitiveness and thus drive user segments and interaction among Weibo's core user group. In first quarter, for relationship-based fee, we focused on the data mining on quality social content to improve the social attributes and economy diversity, and thus effectively promoting user consumption and retention. Meanwhile, we stepped up our investment in social interested products. To elaborate, in the first quarter, we improve the integration of the topics into the core feed, optimizing interest tasks for user to discover and consume different topics. For gaming and campus verticals, we also strengthened the interactive features of super topic to include a community vibe, which led to a notable increase of user engagement and traffic in super topics on a year-over-year basis. Super topic traffic in the first quarter increased by nearly 40% year-over-year, which generated more social content for relationship-based feed and increased the users' social stickiness on Weibo. On interest-based feed, in the first quarter, we focused on the technology - technical update of the recommendation system, as well as algorithm, which combines the behavior characteristic of users from different channels and in different scenarios to experience the feed content recommendation. As result, users content consumption experience has been improved and we saw a steady increase in the user scale and traffic from the previous quarters. [Foreign Language] On the video front, in 2021, we accelerated the content visualization for Weibo's content creators through video account mechanism and thus improved the production and consumption of Weibo's video content whereby strengthening users mindset of using Weibo for video consumption. In the first quarter, we upgraded Weibo's video account products, improving the consumption experience in all video feeds and lower the entry barrier for content creator to participate in the program. As of now, we saw a noticeable increase of content creator coming with registered video account which exceeded 5 million, among which the video accounts with over a million followers each exceeded 25,000. By verticals, entertainment and lifestyle related verticals remain as top [ph]. As of March, for those video accounts with over 10,000 followers, approximately 60% of the accounts and reviews generated from entertainment and lifestyle related verticals. Also, we are pleased to see the rapid visualization trends among certain knowledge-related verticals including popular science, law and education, serving as a supplement to the existing graphic and text content ecosystem of Weibo. On the live streaming, in the first quarter, we launched the feature of Joint Mike [ph] live streaming, which enables the interaction between multiple content creators and users through live streaming. Hundreds of KOLs have joined the test run with enhanced interactive features versus traditional live streaming. Joint Mike performed well in both user retention and timestamp. In the second quarter we plan to launch the Joint Mike live streaming with top media analyst, corporates and with KOLs to strengthen Weibo's brand recognition in the live streaming market. [Foreign Language] Before moving on to monetization, I'd like to touch upon on an adjustment we have made on segment disclosure. We used to classify our activities by customer type since IPO, mainly KA and SME segment. The disclosure measure could help categorize customer with distinction in ad spend and marketing demand. For instance, the marketing demand for KA customer is usually brand focused, while for SME customer it is usually performance driven. Nevertheless, with involvement of the advertising industry and Weibo's stickiness [ph] as well, the distinction between KA and SME segment has become increasingly blurred. On the one hand, customer across those segments has an increasing demand for brand cross performance at products. On the other hand, there's no clear distinction of the amount of ad spent by KA and SME. Therefore we're also de-emphasizing such distinction in our internal management by integrating the two sales teams while increasingly focusing on development of vertical industries, fulfilling each customer's comprehensive campaign needs as well as the competitiveness of all our products in the market. And thus to be consistent with internal management, we will no longer provide a segment disclosure by KA and SME since the first quarter of 2021. [Foreign Language] Let me share with you more color on our strategy of monetization and progress made so far. In 2021, we will further strengthen the competitiveness of our social ad products solidify industry specific marketing competence and acknowledge [ph] potential and efficiency of traffic monetization so as to improve Weibo's monetization skill and market competitiveness. [Foreign Language] From an industry perspective, in the first quarter, our ad revenue increased by a 42% year-over-year on a low base due to the pandemic last year. It also represents 14% growth compared to the first quarter of 2019 before the pandemic, which speaks to the recovery of the overall market environment recovering as well as our efforts to strengthen Weibo's capabilities to directly serve customers across key industries, marketing-oriented services and differentiated marketing strategies. In particular, we're delighted to see a robust year-over-year growth in key industries that will further enhance the competitive advantage. To elaborate, in FMCG sectors such as food and beverage and beauty and the personal care, we put celebrity and KOL marketing and the brand price performance solution into full play delivering a notable year-over-year growth in revenue. In those automobile enhancer sectors, we are seeing changes in market landscape with more emerging brands and shorter intervals between new product releases in the first half of the year. In response, we fully utilize our advantage in promoting new products for customers through hot trends resulting in outperformance of revenue growth of these sectors versus the overall ad business on a year-over-year basis. In luxury category, most top brands customers have shifted their marketing focus to work the domestic market. Therefore, we strengthen their marketing mindset to promote new products through live streaming and with the celebrity and KOL endorsement and thus increasing the revenue in the first quarter by triple digit year-over-year. In the education sector, we did see a pullback from marketing demand due to tightened regulations, while keeping an eye on the subsequent impacts. We are also strengthening the combination of Weibo's unique ecosystem and strategies to encourage customer to try out our content marketing solutions. [Foreign Language] On the ad product, in the first quarter, we always priced on continued optimization of products that leverage Weibo's advantages in brand plus performance kind of marketing such as promoting feed product with KOL, celebrity marketing concepts, and the promoted churn and topic products. Not only could this product help increase brand awareness for customers, it could also fulfill customers' performance driven needs, which largely increase the recognition of this product solution among performance customers. In this quarter, the number of customers who had ad spent on either celebrity or KOL marketing or promoting trends and topics product grew notably year-over-year, with revenues contributed from the fast delivery and strong momentum as well. And meanwhile, for online service and game verticals, while continuing to optimize the algorithm, we upgraded the entire advertising experience and optimized the ad performance for app downloaded customers. For example, we optimized the ATP download ad and installation link and improved download and installation rate. As a result, the ATP download increased significantly after the solution was launched. On video ads, in the first quarter, the ramp up of traffic from video accounts last for a small video ad inventory, and also attract more customers to advertise through video. And thus video ad as percentage of total ad revenues continued to ramp up this quarter. Going forward, we will fine tune the scheduling and distribution of the monetizable traffic and allocate quality and compatible traffic to customers with a stronger performance demand and greater marketing potential so as to maximize the efficiency of traffic monetization. [Foreign Language] Lastly, I'd also like to touch on Apple's recent implementation of the ATP attracting transparency policy in the launch of iOS 14.5 under which new apps are no longer able to access IDFA enabled identifiers for advertising by default without user permission. It is exactly that such change may compromise the precision of attribution in targeted ATP download marketing since IDFA is a key tracker for the ad attribution, especially with the cross ATP activity tracking. In response, we have adopted Apple's SKAdNetwork attribution as an alternative. Nevertheless, in the short term, we expect to face hassles on the ad algorithm and strategy front due to change in the attribution algorithm. In the long run, SKAdNetwork-based attribution could gradually catch up and deliver similar performance as the original model, leveraging model training and advertisers increasing support. [Foreign Language] With that, let me turn the call over to Fei Cao for financial review.

Fei Cao: Thank you, Gaofei and hello, everyone. Welcome to Weibo's first quarter 2021 earnings conference call. Let's start with user metrics. In March 2021, Weibo's MAUs reached 530 million, a decrease of 5% year-over-year primarily to a tough camp last year with our user traffic reaching peak level during the pandemic period. On a sequential basis, our MAUs represented a net addition of 9 million users, mobile MAUs represented approximately 94% of total MAUs. Weibo's average DAUs reached 230 million, a decrease of 10% year-over-year, due to the same reason for MAU. Our sequential basis, our average DAUs represented a net addition of 5 million users. 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. Now let me walk you through our financial highlights for first quarter of 2021. Weibo's first quarter 2021 net revenues was 458.9 million, an increase of 42%, exceeding the high end of our guidance. Operating income was 137.5 million, an increase of 85%, representing an operating margin of 30%. Net income attributable to Weibo reached 113.7 million, an increase of 94%, representing a net margin of 28%. Diluted EPS was 0.57 cents compared to 0.30 cents in first quarter 2020. Now let me give you some color on revenues. Weibo's advertising and marketing revenues for the first quarter of 2021 reached 390 million, an increase of 42%. Mobile ad revenues were 361.8 million, contributing approximately 93% of total ad revenue, up from 89% last year. As Gaofei indicated in his prepared remarks, consistent with market trends and the internal management, Weibo no longer provide a segment disclosure of ad business by KA versus SME starting from this quarter. Let me share some corner on our growth from an industry and ad product perspective instead. For the first quarter of 2021, our leading verticals in terms of ad revenue contributions were FMCG listing products and ecommerce. Weibo has gradually become the cornerstone of many advertisers in this traditionally heavy funding industries to fulfill their integrated branding plus performance need. We were also delighted to see great opportunities with new economies, particularly in the consumption sectors, such as those emerging domestic brands, as these customers increasingly recognize Weibo's unique value proposition in connecting with massive young generation of users implementing celebrity and KOL marketing and delivering viral effects in their content. In terms of growth, the fastest growing verticals were automobiles, luxury and the ecommerce. Apart from low base effect, these verticals have been experiencing rapid secular growth momentum leveraging tailwind in conception receiver shift as well as our differentiated social marketing solutions. From ad product perspective, promotion fees continued to be the largest part, followed by social display and other add-ons, such as promoted check and target. We are encouraged with the customers and humbled of their work and offerings to drive users all the way down the funnel to achieve a 500-hour ad growth. Mostly ad revenue generated from our differentiated promoted trends as the top new product delivered a jump growth, mainly driven by increase of ad inventories and the positive pricing trends as well as a relatively low base last year during the pandemic. Revenue contribution from video ads also continue to trend up, many benefiting from continuous growth of ad demand for video ad products underpinned by good momentum with our video accounts program. Ad revenues from Alibaba for the first quarter was 33.3 million, an increase of 21%. Despite a relatively high base from Alibaba last year, ad revenue from Alibaba continues to deliver double digit growth speaking to the value of our partnership in serving integrated marketing demand for both platform brands and merchants. That said, ad spend Alibaba highly correlated to its own business operation, especially its marketing strategies which may change from time to time. As communicated earlier, we cannot assure that such robust growth will be sustainable in the future. Value added service, VAS, revenue was going to 68.9 million in the first quarter, an increase of 44%, primarily attributable to the revenue derived from the interactive entertainment company acquired in November last year. Turning to costs and expenses. Total costs and expenses for the first quarter were 321.4 million, an increase of 29%. The increase was primarily due to step up in marketing spent and higher personnel related cost. Operating income in the first quarter was 137.5 million, an increase of 35%, representing operating margin of 30%, a decent margin profile amid the market competition and also in line with our expectation, as we proactively set up our spend in channel investment, and video capabilities. Turning to income tax, under GAAP measure, income tax spend for the first quarter was 14.9 million compared to 15.9 million last year. Net income attributable to Weibo in the first quarter was 130.7 million, representing a net margin of 28% compared to 21% last year. Turning to our balance sheet and cash flow items. As of March 31 2021, Weibo's cash, cash equivalents and short-term investments totaled 3.4 billion compared to the 3.5 billion as of December 31, 2020. In the first quarter of 2021, cash provided by operating activities was 244.3 million, capital expenditures totaled 6 million and depreciation and amortization expenses amounted to 12.4 million. Lastly, let's talk about our financial outlook. We anticipate our second quarter of 2021 revenue to grow by 25% to 30% year-over-year on a constant currency basis. This forecast also reflects Weibo's current and preliminary view and is subject to change. With that, let me now turn the call over to the operator for the Q&A session.

Operator: [Operator Instructions] Your first question comes from the line of Alicia Yap from Citigroup. Please ask your question.

Alicia Yap: Hi. Thank you. [Foreign Language] Congratulations on the very strong results. So, wanted to follow up a little bit on these strong outperformance in the first quarter. Was that may be driven by the secular ad recovery, especially with a low base or are we actually seeing we are gaining market share in terms of the ad budget allocation from the advertiser? Any color that management could provide in terms of the trend going into the second quarter, for example, like April or the first week of May, some of these strong vertical that you'll see in first quarter, are we also seeing the trends continue into April and May. Thank you.

Gaofei Wang: [Foreign Language] Okay, so first of all, thank you very much for the question. Let's just be very brief. So first of all, we have been seeing that in Q1 we had a big growth and part of the reason was due to the kind of year-over-year base, like low base number of the last quarter on Q1 of last year, but that was only partially the reason. However, we can see that before talking about the growth rate of the q2, this is still as robust as the Q1, so only partially reason. And also let me talk about the external and also internal reasons of having that high growth of the Q1 performance of the advertisement. So, first of all externally, we are seeing that the recovery of many verticals are very robust, for example, the consumer-related industries like the ecommerce and also FMCG and automobile and luxury as well. And also some of the other very competitive markets, for example, the gaming and also the education industry, which was somehow impacted by certain policies but still, we have strived to realize our target set in the beginning of the year, if we're talking about the year-on-year growth. So this is something about a very good vertical performance. And also, internally, we're talking about the reasons. For example, last year, we have been doing some kind of restructuring of our sales system. So in the past, for example, we had a branding team and sales team that was very much focused on strong at doing service and providing service to those KA customers. However, they are relatively now weaker in providing services to SMEs, and also on the country, those SME sales teams were very much dedicated in providing services, and also get pledges from the gaming and education industry, they're pretty much strong in helping to download or helping to sell the courses, but not that much in terms of organizing activity or doing some kind of branding work for those SME customers. But since the second half of last year, we have been doing a restructuring of our sales system, that is a reason that after Q4 that we can see that we're not performing like the other companies that are only focusing on either grand or KA customers or SMEs, but we actually now have combined this and also that is to say we have a higher and also better strength in gaining the budget from our customers and also improve our competitiveness because the customers could approach Weibo for a lot of effectiveness, for example, content marketing and branding and also effectiveness etc., etc. So that is to say that we are providing a whole package of solution to the customers. And also, that in terms of the quickest growing - one of the quickest growing verticals like automobile, which had almost 60% of the performance or growth and that is to say the kind of backing and also SMEs ad is the quickest growing part. However, in this education sector, we've been seeing that the brand part is actually the biggest growing sector. So that to say in a word, we are having stronger ability to actually gain more budget from our customers.

Alicia Yap: Okay, thank you so much.

Operator: Thank you. Our next question comes from Alex Xie from Credit Suisse. Please ask your question.

Alex Xie: Thank you, manager for taking my questions, and congratulations on very strong results. So I'd like ask about your strategic progress in the use of products. So what will be your key initiatives to increase the user engagement in terms of your product design and operations? And would you like to share any specific targets for some of them? Thank you.

Gaofei Wang: [Foreign Language] Okay. So thank you for this question. First of all, since Q4 of last year, and also in Q1, this quarterly report, we have already been mentioning some of the work and efforts is focusing on the user engagement enhancements. And also for example, the first is that we are trying to get access to those low frequency users, and especially improving the frequency from the external sources and also second from the internal sources. We are talking about, for example, after Q1, we focus more on those kind of activity and also more engagement on the core scenarios and especially, for example, those interest driven or interest-based scenarios like the super topic. And also, we are going to increase the frequency of the content consumption from the KOLs and also the gamers, as well as the campus, etc., products and also like the super topic. And that is the exact reason why we had over 40% of the growth on the super topic. And also talking about the monetization, we are going to actually start doing the monetization since Q2 of this year. And also third point is, we are emphasizing a lot on the growth of the video accounts. And also you can see that not only this can help us to develop the DAU and MAU in terms of user size but also more importantly that we can enhance the consumption of content and also consumption scale of the videos. So that is exactly a focus on the enlargement of the time spanned on the videos within the system. So that is to say that we have been gaining a lot in terms of the traffic inventory in this area. And that is specifically important for us to drive the SME ads industry and also products. And also talking about Q3 and Q2, I don't think that there is any big change. So in a word, we're just going to focus on three areas. The first is that, more channel access to increase the frequency to be more specific and second, is that focusing more on the social content products, and also third, video products.

Alex Xie: Okay.

Operator: Thank you. Our next question comes from Thomas Chong from Jefferies. Please go ahead.

Thomas Chong: [Foreign Language] Thanks, management for taking my questions. I just have a question relating to the cost side. Given that we are going to invest more in content to drive user growth and engagement, can you share about our spending budget for this year, together with the trends in R&D and sales and marketing? Thank you.

Gaofei Wang: [Foreign Language] Alright, first of all, let's give you the answer in relation to the content part. So you know since this year, we are talking about a kind of competitive landscape here and also, we are going to focus more on the investment to the content. But of course, that this particular fashion of doing the investment is quite much different from the investment to the content or to the video, sorry. So that is to say like, we're talking about the collaborations with the NBA last year and also CBA, and also China Super League Football League of this year, quite similar. So that is to say that we are going to focus more on those kind of a social accounts like in Weibo, and also to do some kind of monetization or socialization work but we're not going to act like a video actor, which is to say that we are not going to buy a lot of content in that sense. [Foreign Language] So that second of all, let's talk to you about the monetization or the business side or commercial side. So that is to say that, first of all, we are trying to provide to our customers the kind of commercial solution that is pretty much focused on the content marketing. So that is to say that altogether, the regular kind of solutions that we are providing to our customers, we're also going to put and include inside package, the kind of a content created by the KOLs and also those top notch KOLs. So that will generate certain costs in this particular area. However, if you are talking about the kind of sales gross margin of this particular area, we are not seeing any deduction on the gross margins here. So that is to say that even though the absolute figure is going to kind of increase but talking about the percentage against the total sales, this is not changing. [Foreign Language] And also, first of all, let's talk about the expenditures on the channel side. So as we have already stated last year that since this year, we are definitely not going to have expenditure or expense more focusing on the channels. So the reasons are first of all, because of higher competition and more intense competition here, we are going to spend more money in getting access to users, especially the view users and also more engaged and active users. And also that is to say, however, having said that, our kind of user acquisition cost is relatively lower than our competitors. And also, second of all, we are having a more stringent appraisal over the ROI of this particular area. So that is to say that, in half a year of time, we're going to try to balance this particular kind of investment versus the US acquisition cost. So that's to say that the conclusion is that since Q1, we have already seen a big increase of this particular expenditure on channels, however, we are going to definitely focus more on the sustainable kind of growth of the channels. And also, we are going to have more stringent policies over the appraisal of this particular indicator and also ROI of this expenditure.

Operator: Great, thank you. Our next question comes from Alex Ko from Morgan Stanley. Please ask your question.

Alex Ko: [Foreign Language] Thank you management for taking my question. So, would like to get a sense of like, the recent fan economy, like the regulatory headwind or like the crackdown, would that have like any impact on like any operational or financial impact on our business fundamental? Thank you.

Gaofei Wang: [Foreign Language] And also, you know, talking about this question. First of all, I have to say that this is not a very good question for Weibo to comment, but rather Baidu IT should come on this, but however, let me just share you some of my opinions. So I think that we're talking about the two levels of regulation. The first one is that, first of all, we're not talking about this particular fan economy. But I think that this is more like a kind of illegal funding or crowd-sourcing, and also to help those fans to hit the ranking. But the thing is that, all those kind of motion or misleading kind of a platform or the funding platform or the promotional platforms, they are not Weibo. But actually people are discussing, however, all those topics on Weibo. So we are keeping a very close eye on this topic, and also a very close relationship and also communication with the government. And also second of all, talking about the fan economy, I think that this is pretty common here in China, also in the other part of the world. And also, I think that, in Weibo, we're trying to divert this particular to a very good direction and positive direction. So that is to say that this topic has been talked and discussed for months and also for the past half a year. And also, for example, talking about the KOLs servicing Weibo, I think that their fan economy is more like engaging their fans to really do some promotional activities or charity activities or some called some of the positive energy-oriented activities. For example, that one of the indicators that we care and concern about is the charity value that created by their KOL together with their fans and followers, so that is to say that very thing, this is something very positive driven. And also, having said that, still for this particular problem or issue, as you have described, this may occur and emerge due to the period of time when the reality show actually was quite popular, but the platform wasn't quite complete, and there wasn't a very complete agent system or the servicing system in place. So some of the platforms were taking advantage of that and trying to promotion this so-called fan economy of that, but that wasn't something quite virtuous and benign. So I think that need to be eradicated afterwards. [Foreign Language] And also, another thing is that in the past one quarter, we have been seeing a very active communication of Weibo, and also our regulatory bodies. So that is to say that for the platform and big platforms such as Weibo, we are having a very stringent requirement over the management of the fans and also the fans group, as well as the agency and also the KOLs themselves. So we should manage and that to say that verification of the identities of the followers and also the fans group of that particular agent company or the KOL is a must and also necessary thing for us to do. So that is to say, we are not allowing any activities organized by the irrelevant fans group, according to that regulation. And also, I think that this is a beneficial thing for the development of this industry, and also a very healthy development and management of this whole fans economy. But the thing is that, this might seem a kind of temporary impact on the pause and stop of some kind of reality show programs and this main have seen a kind of a reduction over the short-term traffic on that. However, I think it's pretty much important for Weibo to manage this as a whole and also, we are going to gain long-term benefit by managing strictly on this particular notion.

Operator: Thank you. Right, thank you. So we have reached the end of the question-and-answer session. With that, we conclude our conference for today. Thank you for participating. You may all disconnect.