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Morningstar | Weibo Guided To Weak Revenue Growth in the 2Q; FVE Reduced to USD 78

Narrow-moat Weibo’s net revenue was up 14% year over year or 21% on a constant currency basis in the quarter, versus guidance of 20.5% to 23.5% on a constant currency basis. Advertising and marketing revenue was up 13% or 20% on a constant currency basis year over year. Second-quarter guidance of revenue growth is 7%-10% on a constant currency basis. We reduced our full-year revenue growth forecast of 19% to 10%. We expect recovery in the second half as there are signs of recovery in the remainder of the year stemming from lower base and some meaningful improvements in SME in May. We lift 2020 revenue growth to 6% from 4% due to low base effect. Operating margin was 30.8% in the quarter, a tad lower than the 31.3% in the first quarter of 2018. The higher costs were primarily due to revenue sharing incurred by live streaming and higher staff costs. Spending was contained as the sales growth slowed down. We expect margin decline to be 120 basis-points for 2019 versus our previous assumption of a 240-basis-point drop. We flag the downside risk being a worse-than-expected macro environment and depreciation of the Chinese yuan.  We reduced our fair value estimate to USD 78 from USD 84 and the shares are undervalued.

Monthly active users, or MAU, were up 1% to 465 million sequentially. We estimate that Weibo’s penetration in the age bracket of approximately 11 to 30 is mid-80%. Management aims to acquire more users from third- and fourth-tier cities who have stronger interests in user-generated content, or UGC, versus users in the first- or second-tier cities. Weibo will provide more UGC in its feeds to these users. The initial test of this approach has seen retention per user in third- and fourth-tier cities double versus the first- and second-tier-city users. Weibo will also increase location-based content to attract these lower tier cities’ users. This could help Weibo to drive its penetration higher but we think the headroom is significantly smaller than before.

We think increasing user engagement will be a more important way to drive growth going forward. DAU/MAU, a metric of user engagement, was 43.7% in the quarter, compared with 43.3% in the fourth quarter and 44.8% in the first quarter of 2018. Management attributed the sequential higher user engagement to the company’s stronger focus on higher user engagement. On a full-year basis, DAU/MAU has gradually declined every year from 44.9% in 2015 to 43.3% 2018. Average revenue per DAU was up only 2% year over year.

In the first quarter, key accounts, KA, revenue grew 31% year-over-year or 39% on a constant currency basis, helped by increasing demand by KA to associate their campaigns with a blockbuster IP and measure the campaign results through data analytics. Weibo has partnerships with TV stations and advertisers can evaluate their sales conversion on Tmall from the fans accumulated through advertising campaigns on Weibo in collaboration with Alibaba through the uni-marketing program.

SME revenue was up only 5% or 12% on a constant currency basis as top SME customers’ ad spend are more scattered due to more ad supply. Macro uncertainties and tightened regulations in the industries of Weibo’s customers continue to be the reasons to blame. Weibo has put in more effort to improve targeting and ad content for e-commerce customers, which saw solid growth. We expect the gaming segment’s ad spending will improve as more gaming licenses are expected to be approved going forward, management expects recovery will take one to two quarters. Weibo has formed a new sales team to serve its top SME customers directly to improve their ad performance. These should help Weibo to offset the weakness stemming from excess supply.

Weibo remains proactive in driving content consumption. Weibo will focus on expanding the scale of top content creators and increase their influence in mid-tier and long-tail verticals such as aviation and collection verticals. The enhanced distribution of content from mid-tier and long-tail verticals led to more than 50% year-over-year increase in content exposures from these verticals in interest-based feeds. In the quarter, Weibo offered traffic support to selected high-quality videos and videos by selected content creators in interest-based feeds. In the quarter, daily video post by top content creator was up more than 50% year-over-year, predominantly driven by professionally generated video content. Average daily time spent per user who accessed the relatively new video community tab was more than double users who didn't. Weibo is streamlining key opinion leaders’ video content creation process, with an updated version expected to be out in June. This is expected to drive new users and improve the user engagement of the video community tab.

Weibo refined the algorithm of the interest-based feeds, enhancing exposure of content from hot search and trending topics. Weibo also improved its algorithm in terms of targeting and ad provision conversion.

Cash and cash equivalents was down USD 408 million or 33% sequentially, with USD 205 million increase in amount due from SINA, USD 178 million rise in long term investments, and USD 101 million increase in prepaid expenses and other current assets. In the first quarter, cash provided by operating activities was USD 80.8 million, versus USD 164 million in the fourth quarter and USD 84.8 million in the same period in 2018.