Weibo Corporation (NASDAQ:WB) Q3 2023 Earnings Call Transcript

Weibo Corporation (NASDAQ:WB) Q3 2023 Earnings Call Transcript November 9, 2023

Weibo Corporation beats earnings expectations. Reported EPS is $0.57, expectations were $0.54.

Operator: Good day, and thank you for standing by. Welcome to the Weibo Reports Third Quarter 2023 Financial Results Conference Call. [Operator Instructions] 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.

Sandra Zhang: 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 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 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 the future prospects. Our non-GAAP financials exclude certain expenses, gains or losses, and other items that are not expected to result in future cash payments or 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.

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 third quarter, adding approximately 21 million and 8 million users year-over-year, respectively. Our monetization from the supply side in third quarter, benefiting from the promotions of popular TV series and movies during the summer vacation. Our user engagement continues to improve and the 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 on ad revenues growth. First, the macro economy and consumption fell short of expectations. Secondly, a few unexpected adverse factors in late August negatively impacted on some clients’ budgets. Thirdly, in Q3 last year after the pandemic lockdown, advertisers have been intensively launching new products and increased ad placements. Due to these factors, our ad revenues in Q3 picked up modestly year-over-year, with ad performance of July declined 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’ll continue to focus on improving operating efficiency. And our non-GAAP operating income reached USD 163.9 million, representing a non-GAAP operating margin of 37%. Next, let me 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 increased scale of hot trends on Weibo in Q3 will continue to collaborate with handset manufacturers and step up our channel investments moderately and thus improving the scale of high-value users acquired through channels and the conversion rate of these high-value users to DAUs. In third quarter, the average DAUs acquired from handset manufacturers achieved double-digit growth quarter-over-quarter, in particular 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 feed and continuously increased the average daily refreshments per user.

As we pay more attention to the development of vertical content ecosystem, the interaction efficiency between KOLs and their followers improved in Q3 for relationship-based feed. It motivated engagement of social content creators and thereby, improves 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 to reward 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 2 aspects not only lead to a quarter-over-quarter increase in the number of average daily engaged users and engagement efficiency of relationship-based feed, but also boosted KOLs content generation in third quarter.

For interest-based feed, we have also been refining its user interaction efficiency and have upgraded recommendation algorithms by modifying content tags and user demographics. As a result, the consumption of interest-based feed and video feeds per user grow 20% year-over-year. On the content front, this year, we mainly focused on 2 aspects of our vertical content operation. First, we further solidify 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 and healthcare verticals, as well as 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 celebrity and KOLs was stimulated by the hot topics related to TV series, variety shows and movies. In Q3, the average daily traffic, the number of interactive users and total interactions grow year-over-year and achieved double-digit growth quarter-over-quarter. For 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 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 experience 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 tap into the 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 synergetic verticals with the client marketing ecosystem such as beauty, apparel, health care, et cetera, with focus 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 the discussion of industry hot topics and thus, enhanced clients’ recognition of Weibo and further reinforced our market competitiveness. At present, we are pleased with the early results in the health care vertical. We have expanded partnership 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, the number engagement and traffic from professional doctors grow significantly year-over-year, which also supported the sustainable development of health care clients in Weibo’s marketing ecosystem.

On 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 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 that they could obtain business recommendation more easily, and high-quality commercial content stands a better chance of traffic support. In 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 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’re 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 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 gradual ad recovery in August and September with a 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’ll 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 builds 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 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 launch. As mentioned before, we also beefed up our operation efforts in these business verticals. For example, the health care industry is on the trajectory of steady growth, with ad revenue maintaining double-digit growth year-over-year in third quarter. We are also encouraged to see greater quantity and diversity as customers in health care sector, from performance-oriented aesthetic medical institutions originally and now to various kinds of clients across upstream equipment manufacturers, pharmaceutical companies, health care platforms, et cetera, 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 booking 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 content ecosystem and hot topic operations during the public testing period of new games, but also reinforced the routine build-up of 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 gaming industry booked a double-digit growth from the second quarter. 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 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 would 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 highlight for the third quarter 2023. Weibo’s third quarter 2023 net revenue 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 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 of 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 3 verticals continued to pay off, which enable handset manufacturers to target high-value users and build market hub during high-end product launch. We also benefited from solid traffic performance built upon 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 product 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 VAS segment, let me share preliminary color on the trends entering the fourth quarter of 2023. On the upside, advertising market continued to demonstrate 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, benefited from opportunities brought from 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 decrease of game-related revenues. Turning to costs and expenses. Total cost 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 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 were $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.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Miranda Zhuang from Bank of America.

Miranda Zhuang: 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?

Gaofei Wang: All right. Thanks for the question. So, 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 the consumer demand and advertising placement requirements during the e-commerce event on 618. And also after that, we’ve been seeing a quite weak performance during the July and also August, and also a much better performance in August and also September. And also let me share some of the colors on the Q4 expectations.

So actually, for the Double 11 shopping festival and also the e-commerce events, we’ve been seeing a very good trend. For instance, we expect to have — also in Q3, we’ve got over 50% of the growth because of Asian Games by Alibaba. And also in Q4, we’ve been seeing also activation of the ad placements by all kinds of different e-commerce platforms like the Double 11 and also Double 12 shopping festivals. So that we are expecting a year-on-year growth for the Double 11 and also Double 12 e-commerce events, especially for the e-commerce, including all kinds of different brands and also platforms. Okay. And also let me talk to you about some of the verticals. So first of all, in the second half of this year, we had a very good momentum of the growth for the verticals like the automotive and also digital products, food and beverages, as well as the health care as we have already stated.

So you can see that because of a very good recovery of the traffic for those verticals and very good works around the ecosystem building and also the accounts recovery as well. And it’s quite special in terms of the automotive industry, because we really had a very good growth in the first half of this year. However, in the second half of year, we’ve been seeing a slowdown of the sales both for the ICE vehicles and also the electric vehicles. But of course, for the electric vehicles, we do see actually a revenue increase, especially for the ad revenue increase. But actually, the ad revenue for the ICE vehicles actually was decreasing. So as a result, we are expecting a lower performance in the second half of the year in terms of the ad revenue from the automotive industry than the first half.

But throughout the whole year, we expect to have a double-digit growth for the automotive industry as a whole. Okay. Got it. All right. And also in the first half of the year, we do see some of the challenging verticals, for instance, the fashion and also the beauty products and also the gaming industry. And of course, for the gaming industry, we return to the track of a positive growth in Q3 because of the growth of some of the new games and also the optimizations in terms of the algorithms and also the paid gamers. And so as a result, we do actually see a very good recovery starting from Q3 for the gaming industry because of the better performance and also the better allocation of the advertisement budget for some of the medium to high-end games.

And also it is going to be the momentum that is continued all the way to Q4 for gaming industry. And also, it’s pretty much challenging for the beauty and cosmetics industry because in Q3, the operational effects actually was decreased. And also as a result, the budgeting — the budget for the marketing of some of the new products for the cosmetic and also beauty industry was also decreased. So, you can see that for Weibo. Of course, we do actually see a lower-than-expected recovery of the ecosystem or the content ecosystem. And also, of course, we’ve been dedicated a lot on the investment of our resources and also the operational effects to this particular area. And also, we do see a traffic that actually has recovered to the level before the COVID.

However, still the account structure wise, it is not as good as the situation before COVID. So still — meaning that we are in lack of the number of those influential and also impactful accounts in this area. So, this does take time for us to see a full recovery for this industry of fashion and also beauty care products. So as a result, we expect to have a year-on-year decrease for this one. And also second part of your question was pretty much about the enhancement of our competitiveness of ecosystem of the advertisements. So, I had several points to be sharing with you. The first one is that still, we are going to be focusing on the value and also the ARPU of the Weibo users. So in the second half of this year, our strategy was not only focusing on the volume or the number of users, but actually, on the total structure of the users, meaning that we have been focused on those high ARPU users, for instance, the users of the Huawei and also the iPhone users.

So if we can really increase the number of those high ARPU and also high-value users, we do see a more willingness for them to allocate their budget on Weibo for the reimbursements. Also, judging from the feedback that we’ve got for the Double 11 shopping Festival of last year, we did see that particular effectiveness if we’re trying to focus on those high ARPU and also the high-value users. Okay. Got it. And also second one on the service provision capabilities, especially talking about the competitiveness of our advertisement service, I have 2 points to be sharing with you. The first one is that, actually, for those branded consumers and also customers, nowadays, we did see fewer and fewer customers of those brands that were actually procuring the advertisement for the purpose of exposing their brands only.

So, we do see, actually, because of our very unique competitiveness in terms of the KOL ecosystem and also the hot trends and also hot topics on Weibo, we do see, actually, those customers choosing the Weibo as a platform for them to place the advertisement. For instance, we did have a very good endorsement of those important accounts or the KOLs to really emphasize on the advertisement and also some of the, for instance, placements of their products in the advertisement. So because of this, we do see a very good competitive edge comparing with the other media like the newspapers or video accounts or some of the other like television and also radio stations, for instance, we did see. Still, Weibo is keeping our competitiveness and also the competitive edge over the other platforms for those branded consumers or customers.

Got it. And also, second point is on those performance-based ads. So especially, I would like to make an example of the recovery of our gaming vertical. So as I have already stated that we have been optimizing on the algorithms and also which is going to generate the positive ROI for the customers. And for instance, we are really focusing on the conversion and also the increasing — increasement of those conversion rate for those paid users in this area. And also this particular thing is also related to our strategy of focusing on those high-ARPU value users. And, for instance, the very important thing is that not only for gaming industry, but also for e-commerce and entertainment and also the other relevant for consumption, for instance, as verticals, we do actually see the better optimization of our algorithm, which is around the area of making those pay users to actually consume the contents in those different verticals.