Weibo Corporation

The conference will begin shortly. To raise your hand during Q&A, you can dial star 1-1. Good day and thank you for standing by. Welcome to Weibo's second quarter 2022 financial results call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 11 on your telephone. Please be advised that today's conference is being recorded. And now, I'd like to hand the conference over to Ms. Sandra Zhang from Weibo IR team. Thank you. Please go ahead.

Thank you, operator. Welcome to Weibo's Second Quarter 2022 Earnings Conference Call. Joining me today are our Chief Executive Officer, Gaofei Wang, and our Chief Financial Officer, Fei Tao. 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, 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 X result to differ materially from those contained in any full looking statement. Weibo assumes no obligation to update the full looking statement in this conference call and elsewhere. Further information regarding this and other risks is included in Weibo's annual report on Form 20F and other filings with the SEC. All the information provided in this press release is occurring as of the date hereon. Weibo assumes no obligation to update such information, except as a required and applicable law. 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 payment and are not recurring in nature or are not indicative of our core operating result and outlook. Please refer to our press release for more information about our non-debt measures. Following mentioned prepared remarks, we open the lines for a brief Q&A session. With this, I would like to turn the call over to our CEO, Gao Fei Wang. Thank you. Hello, everyone, and welcome to Weibo's second quarter 2022 earnings conference call.

On today's call, I will share with you highlights in Weibo's user product monetization in the second quarter of 2022. On the user front, Weibo's MAU reached 582 million, and the average deal used reached 252 million in June 2022, adding approximately 16 million and 7 million users year-over-year respectively.

In June, 95% of Weibo's MAUs came from mobile.

In terms of commercialization, due to the impact of the outbreak of the epidemic in the main regions of China and the rise of the coronavirus, the sales of customers on Weibo have been negatively affected to a large extent. Most of our customers have begun to delay or reduce their sales budget since the second quarter. Until June, with the release of the so-called Shanghai and Beijing regions and the opening of the 618 e-commerce season, customers gradually resumed production, Online marketing activities have only begun to resume gradually. In 2019, Weibo's total revenue reached $4.5 billion, with a decline of 22% year-on-year. Excluding the exchange rate factor, the total revenue decreased by 19% year-on-year. Among them, advertising revenue reached $3.86 billion, with a decline of 23% year-on-year. In advertising, the ratio from the mobile end reached 95%. After the company adjusted, the profit and loss reached $1.45 billion. After adjustment, the profit and loss rate reached 32%, which increased by 29% in the previous quarter.

On monetization, in the second quarter, the COVID resurgence, together with lockdown measures in certain major areas of China, adversely affected the ad placement by clients, and most of our clients postponed or cut back their marketing budgets since the beginning of the second quarter. In June, when Shanghai and Beijing ended the lockdown step-by-step, business gradually came back into operation. As the June 18th e-commerce event kickoff, Advertisers gradually resumed their online marketing campaigns. In this quarter, our total revenues reached $450.2 million, a decrease of 22% year-over-year, or 19% year-over-year on a constant currency basis. Our ad revenues reached $385.6 million, a decrease of 23% year-over-year, and 95% of our ad revenues came from mobile. This quarter, our non-GAAP operating income reached US$145.3 million, representing a non-GAAP operating margin of 32%, up from 29% in the prior quarter. Next, I would like to introduce the situation of Weibo in terms of product operation and commercialization.

Second, under the overall epidemic situation, the goal of our product operation is to strengthen the competitiveness of the platform, and through improved operation efficiency,

Next, let me share with you our progress made in the product monetization in the second quarter. On product front, given the current market condition, we continue to focus on enhancing Weibo's competitiveness to improve operating efficiency, maintain user skill, and drive user engagement.

In terms of channels, the second quarter continues to implement the channel optimization strategy, focusing on enhancing the channel ROI. This year, in the first half of the year, The cost per unit is one-third lower than that of the same period. This is due to the continued reduction in the budget investment of the DRI channel. On the other hand, on some high-quality channels, we continue to deepen the channel cooperation relationship and enhance the investment efficiency. We can use the channel strategic cooperation partner to maintain a close cooperation based on product and content level, so that we can cover more users with Weibo's hot points, social content and services, and also promote Weibo to be an indispensable application in the self-development ecosystem of partners. In the first half of this year, we focused on strengthening cooperation with partners based on hot-point products, and expanded the coverage of the core population on the hot-point content, which significantly improved the efficiency of users. At the same time, we also strengthened the influence of our hot-point brand while cultivating users' hot-point knowledge on Weibo. In June, the number of hot-point users increased by more than 50% compared to December last year. In addition, we have continued to work with channels in more cooperation modes, including commercialization, On channel front, in the second quarter, we continue to implement optimization strategies on channel investment and focus on improving channel ROI. In the first half of this year, our use acquisition cost decreased by about one-third from a year ago.

as we continue to reduce budget for low ROI channels and deepen our cooperation with high-quality channels and increase use acquisition efficiency. With the strategic channel partners, we have been innovating our cooperation on product and content front in order to reach more users with Weibo's hot trends, social content, and services, and to promote Weibo as the essential application in their ecosystem. In the first half of this year, We step up our cooperation with channel partners based on hot trends, making Weibo hot trends available in more key portals. This initiative significantly increased user acquisition efficiency and strengthened the influence of Weibo's hot trend. Channel usage related to hot trends in June this year increased by more than 50% from last December. In addition, we have been actively trying more cooperation approaches with channel partners including our monetization, to jointly improve user skill, brand influence, and monetization for both sides. These attempts shall deliver notable results in the second half of the year and further improve the overall ROI of channel investment.

In terms of social activity, in the second quarter, we intend to strengthen the product's social attributes, increase the scale and activity of core business groups. In terms of traffic flow, in the second quarter, we intend to maintain a stable traffic flow. The key is to improve the flow structure of the relationship building, so that more content that can be transmitted and interacted can be presented in the relationship building. On the one hand, the content of UGQR can be distributed easily. On the other hand, the community based on UGUC content can be integrated into the activity of the user in the community through algorithmic optimization, so that more community nodes and content can be distributed in our information flow, so that the user can build relationships and interactions with more efficient consumer community content in the core scene. These flow structure adjustments On social attributes, we continue to enhance the social features of our products and increase the skill and engagement of our core users. On relationship-based feed, while maintaining stable traffic, we put more emphasis on optimizing the traffic mix

of relationship-based feeds to allow more exposure of content that can drive distribution and interaction. To this end, on the one hand, we lean towards the distribution of high-quality content generated by KOLs. On the other hand, in a community dominated by high-quality UGC, we increase user engagement via optimizing algorithms to distribute more community nodes and content in a relationship-based feed. encouraging users to consume community content, establish relationships, and make interaction more efficiently in the feed. Such adjustment on the traffic mix has shown notable progress. In June, the traffic of the relationship-based feed maintained steady growth from March, with user interaction increased by more than 10%, which improved the social stiffness.

In addition, in terms of community, we continue to strengthen the product construction of our products. and planning the integration with the core consumer scene. In June, the platform launched an independent community consumption entrance to the location of the main interface, to meet the needs and relationships of users based on virtual social and surrounding social consumption needs. At the same time, combining the distribution of community content in the core scene, the overall improvement of users' community content consumption and interaction scale. In June, compared to the previous quarter, the size of community users, the number of posts, and the number of posts, continued to maintain a growth of 2%. Under the current market environment, On the community products, we continue to enhance Super Topic products and its content distribution mechanism in the main fees. In June, we upgraded products with Super Topic as an independent tab at the bottom of the main page of Weibo.

to meet users' need to make consumption and build relationship based on interest and location. In June, the users' field, the number of users who posted, and the number of community remain double-digit growth from March this year. In a current market environment, the increase in user engagement in a community further enhances users' thickness on Weibo. It has also gradually improved the distribution system of relationship-based feeds, which would benefit the long-term healthy development of our social products and the platform itself.

In terms of the content and ecology, our focus this year is to focus on the vertical field and accounts, and to enhance the operational efficiency of the platform. In the first half of the year, our resources and traffic were reduced to bring users active and interactive in the field of accounts. Overall, we have made a more obvious progress. The flow of these fields and accounts increased by 2% in October last year. For example, in the game field, we focused on e-sports operations in the first half of the year. By strengthening deep cooperation with e-sports competitions and clubs to achieve the influence of domestic and foreign competitions, the domestic club is fully covered by e-sports in Weibo. The number of players has reached 90%. The investment in the e-sports content ecosystem in the game has further promoted Weibo's opportunity to promote commercialization in the e-sports field. In the field of sports, After the Chinese Olympic Games, we continue to invest in the activities of top athletes. Athletes' traffic and interaction volume on Weibo increased more than twice as much as on December 12 last year, which also promoted the obvious improvement of athletes in Weibo's commercialization. As for the number of videos, the number of videos will continue to increase with the opening scale and the number of videos played. In addition, the quality of the video number will be supported by social media, and more traffic will be recommended. In June, the total number of videos played increased by twice as much as on December 12 last year. At present, the above strategies have been used to make Weibo

On the content front, this year we focused on content and accounts of key verticals and improved our operating efficiency. In the first half of this year, we increased resources and traffic support to key accounts that can stimulate user engagement and interaction on the platform. In general, we made clear progress. The traffic from these verticals and key accounts grew double-digit from last December. For example, in the gaming vertical, we focus on esports in the first half of this year. Through strengthening impact cooperation with esports events and clubs, our cooperation fully covered influential events in China and abroad, as well as domestic clubs, with over 90% of players verified their account on Weibo. Our investment around the content ecosystem for gaming and esports verticals further improved our monetization capability in the gaming and esports verticals. In the sports verticals, after the Winter Olympics, we continue to focus on operations to encourage engagement of these top athletes on Weibo. The traffic and interaction of these top athletes on Weibo more than doubled from last December, which also promoted their monetization capability. On the video account front, The number of video accounts and its viewership continues to grow, benefiting from platform social attributes. More traffic has shifted to their high-quality video accounts, resulting in a double-digit growth in video views in June compared to last December. We are glad that our initiative has made way for a must-have platform for top users to operate in the current competitive landscape for social platforms.

Next, let's talk about business. Although the second-tier marketing environment is getting worse, the policy of the macroeconomic economy is gradually falling, and it has also released a certain level of positive signals, such as the welfare policy of state-funded state-owned new workers' cars, etc. At the same time, we also noticed that the new trends in customer investment behavior driven by the epidemic, such as the investment of brand customers to increase the efficiency of e-commerce, and the new trends in these industries and customer marketing models are also new opportunities for Weibo to receive budget. Moving on to monetization.

Despite the challenging market environment in the second quarter, we saw a positive signal of incentive policies on the macroeconomy being implemented, such as China's policy support toward domestic new energy vehicles. In the meantime, we saw clients' new placement trend driven by the pandemic. For example, brand advertisers increased ad budget in e-commerce and performance-based ads. These new industry trends and marketing models create new opportunities for us to obtain budgets. As such, in the second half of this year, we focus on beefing up the competitive edge of our brand plus performance ad offering in key verticals. To elaborate, we will stack up our efforts to address these trends and make breakthroughs both on the technology and sales front, aiming to further integrate brand plus performance ads Wisconsin operations to devise more mature marketing solution combos, which enable us to maintain our core competitiveness and capture higher average share amid intense market competition.

In terms of trade and marketing, the epidemic and wide-ranging measures in Shanghai and Beijing regions have brought a significant negative impact on the production, logistics, sales, and offline activities of enterprises. This also directly affects the advertising and marketing markets. especially to the e-commerce and Japanese makeup industry. Compared to the traditional advertising network of the past, the e-commerce node of 618, the budget of customers this year has been significantly reduced. In the other industry, although customers have also been affected by the pandemic and the problem of the supply chain, they are satisfied with the policy's support for new workers. The new worker industry will gradually recover and grow after the epidemic, and we have also provided a more complete online release of marketing plans. For example, the launch of the ideal L97. We organized, media, star, QL, production and operation of Weibo topics in each of the stages from the pre-launch, to the release, to the deep analysis. Through the hot search, we enlarged the transmission effect. In addition to Weibo, the promotion of quality advertising, in just 36 hours, the number of new car related topics was more than 120 million, and the number of discussions was more than 800,000. For more industries, we once again demonstrated the service capability of Weibo's unique content marketing and brand inspiration. so that customers can clearly perceive that in addition to the traditional marketing model of Weibo, through organizing media, QOL, producing topics and content, and combining the marketing capabilities of Weibo's hot spots to expand the dissemination and discussion of topics, the brand's ability to make a breakthrough. After the release of L9, more digital, car, fast-selling, and luxury products were released on Weibo, and customers' budget for Weibo increased significantly. On industry marketing, in the second quarter, a series of lockdowns and preventions in Shanghai and Beijing significantly disrupt production, logistics, sales, offline activities, etc.

which directly weighed on the ad market, especially on e-commerce and the cosmetic industry. During the retro ad rush of the June 18th e-commerce event, this year's clients significantly reduced their ad budget. As for auto industry, despite COVID headwinds and industry-wide problems such as the supply chain, the new energy vehicle industry gradually resumed growth benefiting from policy support. In response, we offered a more integrated marketing plan of the online release. For example, upon launching the Li Auto L9, we organized KOLs and media to generate and operate topics on Weibo from pre-launch to release, and then intact interpretation stage, while amplifying the organic distribution effect with Hot Trends. Coupled with brand-class performance ads, in just 36 hours, topics related to AO9 were viewed 1.2 billion times and discussed 800,000 times. The success story with Lee Auto demonstrates again with its incomparable capability of content marketing and the blockbuster creation to more industries. In addition to the traditional brand-class performance models, Weibo is capable of organizing media and KOLs to produce topics and content and combining hot events to amplify topic dissemination and discussion, enabling customers to build brand momentum beyond the industry. After the L9 release, more digital, auto, FMCG, and luxury brands chose to launch their products on Weibo. They significantly increased their original budget for Weibo, recognizing the marketing effect of the new product launch. In addition, the game-related industry maintained rapid growth in the second quarter as we kept on expanding the marketing model of integrated brand-class performance ads with content operations in the past few years, which reinforced Weibo's capability to capture ad budget.

From the perspective of the overall advertising business in the third quarter, the overall customer market is still cautious in advertising. In the automotive and design industries, as the epidemic eases and the government releases, the market consumption capacity will definitely release. The customer industry is gradually recovering. In the wake of the growing growth, the overall industry development and brand marketing trends continue to rise. The advertising budget of these two industries is in the third quarter, showing a warm-up trend. With the growth of micro-blogging in these industries and content integration marketing projects, customers have recognized Weibo's diversified marketing service capability, and it has also promoted the increase in Weibo's budget. As of now, at the end of August, the income of these two industries in the third quarter has increased significantly in the second quarter. In addition, due to our continuous investment in the game field, we have maintained a gap in the case of a complete recovery of the short number. But in the field of e-commerce and hot makeup, we see that the customer market is still conservative in the market of brand hair. The full recovery of advertising budget still takes some time, For example, during the epidemic, Japanese makeup industry customers were challenged in production and logistics, and each brand faces the pressure of reducing storage, and the overall budget is inclined towards discount. This new trend also gives us a new breakthrough in advertising product technology and sales in the second half of the year. For these industries and customers with e-commerce discount needs, in the third quarter, we will focus on promoting cooperation with some e-commerce platforms by strengthening investment in advertising products and research, to improve the ability of customers to convert their e-commerce results in Weibo, and thus improve the customer's budget in Weibo. At present, the day-to-day makeup has been restored for a long time, but due to the high number of people attending the Olympics last year, it is still under a lot of pressure. On the other hand, we will continue to enrich our content marketing scene, and expand the content marketing scene, which is originally based on entertainment, into media content marketing, day-to-day marketing, and more content elements. We will also expand Weibo's special topic operation Entering into the third quarter, advertisers still seem to be conservative on their ad budget in general.

On the upside, the auto and luxury verticals have gradually exhibited recovery trends and returned to the growth trajectory in the industry development and thus branding campaigns. with ease of the pandemic and the policy support that resulted in pick-up in consumption. Currently, we are encouraged to see a notable sequential ad growth and capture higher ad-value share in these two sectors, leveraging Weibo's differentiated integrated content marketing options that resonate greatly in the market. Besides, on the gaming sector, despite that the gaming license approval has not fully recovered, we still maintain solid market share of the game ad budget. On the flip side, customers in the e-commerce and daily care and cosmetic sectors continue to be cautious in ad sentiment, meaning that it still takes time for a full recovery. For instance, during the COVID resurgence, customers in the cosmetic and personal care industry have shifted their ad budget towards sales promotion to clear their existing inventories. amid challenges in the production and logistics. In light of that trend, we will step up our efforts to make breakthrough on the ad technology and sales execution front accordingly to elaborate to fulfill sales promotion needs for this industry and customer. We will focus on pushing forward with cooperation between certain e-commerce platforms coupled with investment in ad product in order to optimize customer's e-commerce conversion results and thus capture higher performance-based ad dollars. For personal care and cosmetic category, we have witnessed demand pickup from prior quarter, but still face challenges on a year-over-year comparison due to the tough comp of last year with Olympic-related budget. And meanwhile, we will continue to enrich our content marketing scenarios, extending the previous entertainment-focused one to more diversified elements, such as media content, holiday-based, etc. Our differentiated ad playbook featuring topic operation and across internet influence enable us to elevate our capability to capture ad budgets serving as the cornerstone in further strengthening our competitiveness in the market.

Before I introduce the financial data, I would like to explain a little bit about Weibo's As we mentioned in the last quarter's financial report, this quarter, this year, we will continue to improve the cost-benefit ratio and enhance the efficiency. The previous year achieved certain results. In the second quarter, under the obvious situation of income being affected by the epidemic, our operating profit after adjustment reached 32%, which is a higher level in the industry. Among them, the sales and marketing costs after adjustment decreased by 27%, and the sales and marketing costs after adjustment decreased by 2% in total. This fully reflects the results of our continuous improvement of business efficiency. At the same time, I would like to emphasize that our cost control is not simply to reduce the cost of all kinds of costs, but under the current macro environment and performance pattern, resources will be more in line with our advantages. For example, on the channel, we have greatly increased the cooperation of strategic channels, allowing us to acquire more high-value users. In terms of product management, we have also increased the cooperation of content strategic partners, We have improved the advantages in the hot points and focus areas, such as e-sports and sports. In commercial products, we increase customer content marketing related services and investment to increase our competitive advantage. While increasing the investment in the advantageous areas, we continue to increase the efficiency of operations, reducing the investment of part of the channel head and non-core vertical areas, and at the same time reducing the investment of non-core products. In the second half of the year, we will continue this strategy to maintain Weibo's long-term competitiveness.

Before moving to financials, let me briefly share some color on Weibo's initiatives and achievements in the cost and expense optimization fund. As we mentioned in the last earnings call, this year we'll continue to optimize cost and expenses and improve operating efficiency, achieving solid results in the first half of this year. In the second quarter, despite the disruption from COVID resurgence, weighed on the top line. Our non-GAAP operating margin reached 32%, which remains at a relatively decent level in the industry, with non-GAAP sales and marketing expenses decreasing 27% year-over-year, and its percentage of revenue decreasing 2% versus the same period last year. That said, we'd like to highlight that the cost and expense control is not simply cutting down all the costs. but rather allocating more resources to our advantageous areas against the backdrop of the current macroeconomic situation and the competitive landscape. For instance, we have beefed up our cooperation with strategic channels, resulting in more users acquired with high output. On product cooperation, we deepen partnership with strategic content partners, solidifying our strengths around hot events and vertical areas such as esports and sports. While on monetization, we set up content marketing service and investment to expand our leading edge. And meanwhile, we cut back investment in non-advantages fields, such as certain underperforming channels, content in non-core vertical fields, as well as R&D expenses in non-core products. We'll keep up with this efficiency initiative in the second half of the year, building well for Weibo's long-term competitiveness.

Next, I'll let Cao Fei introduce the financial results of the second quarter.

With that, let me turn the call over to Fei Cao for financial review.

Thank you, Cao Fei, and hello, everyone. Welcome to Weibo's second quarter 2022 earnings conference call. Let's start with user metrics. In June 2022, Weibo's MAUs reached 582 million, representing a net addition of approximately 16 million users. Average DEUs reached 252 million, representing a net addition of approximately 7 million users year-over-year. This was achieved through a disciplined channel marketing strategy, demonstrating Weibo's core value proposition to users. Turning to financials. As a reminder, my prepared remarks will focus on non-GAAP results. All monetary amounts are in U.S. dollar terms, and all the comparisons are on a year-on-year basis and lies otherwise noted. Now, let me walk you through our financial highlights for the second quarter of 2022. We were second quarter 2022 net revenues were $415.2 million, a decrease of 22%. or 19% on a conspiracy basis. Operating income was $145.3 million, representing operating margin of 32%. Net income attributable to Weibo reached $109.7 million, representing a net margin of 24%. Diluted EPI was $0.46, compared to $0.79 last year. Now, let me give you more color on revenues. We were advertising and marketing revenues for the second quarter 2022, which was $385.6 million, a decrease of 23%. Mobile ad revenues were $364.5 million, contributing approximately 95% of total ad revenues. The second quarter of 2022 proved challenging as we expected, with delivering national wide Omicron outbreaks, disrupting economic activities, resulting in broad-based headwinds across the overall advertising market for the second quarter of 2022. Our leading verticals in terms of ad revenue contributions were FMCG, 3C products, and gaming. In terms of goals, gaming, food and beverage, and electronic vehicle sectors continued to trend up against the tough market conditions By benefiting from relatively resilient ad demand from these sectors, we are pleased to capture incremental ad-worthy share from clients in these sectors, leveraging the wide adoption of our integrated social marketing solutions by customers and our solid sales execution. On the flip side, discretionary consumption categories, such as apparel and cosmetics, underperformed due to logistics disruptions and weak consumption sentiment. E-commerce platform and also turned increasingly conservative in their marketing stand amid lukewarm June 18 sales and regulatory challenges. From the ad product perspective, promoted fees continued to be the largest part followed by social display ads and search and topic ad offerings. Entering second half 2022, we have seen signs of advertising market bottoming out in second quarter and gradual recovery on a sequential basis. However, in light of COVID resurgence and the macroeconomic uncertainty, the recovery trend in the second half could be gradual and be more drawn out than the cycle post-COVID in 2020, considering the more fluid COVID situations and the wider regions impacted. Looking forward, we have lots of experience in navigating through challenging market environments and coming out stronger from the downtown. We remain confident in our long-term monetization opportunities that our unique value proposition and a diversified content ecosystem will unlock. Ad revenues from Alibaba for the second quarter decreased 41% to $23.7 million, primarily attributable to its own conservative marketing strategies and cost optimization initiatives amid weak consumption and lockdowns, as mentioned earlier. Value-added service ad revenues were $64.6 million in the second quarter, a decrease of 10%. The decrease of VAT revenues was mainly due to less revenue contribution from membership surveys and game-related surveys. Turning to cost and expenses, total cost and expenses for the second quarter was $304.9 million, a decrease of 13%, demonstrating our initiative to control cost and expenses while enhancing operating efficiency. was primarily due to 27% reduction in sales and marketing expenses, received planned channel investments, and reduced offline activities. Operating income in the second quarter was $145.3 million, representing operating margin of 32%, exceeding our expectations as it factors in operating deleverage amid COVID headwinds and our initiative for expense optimization. Turning to income tax and the gas measure, income tax expense for the second quarter was 17.5 million compared to 46.9 million last year. Net income attributable to Weibo in the second quarter was 109.7 million, representing a net margin of 24% compared to 32% last year. Turning to our balance sheet and cash flow items as of June 30th, 2022, WebOS cash, cash equivalents, and short-term investments totaled $3 billion, compared to $3.1 billion as of December 31st, 2021. In the second quarter of 2022, cash provided by all premium activities was $83 million, capital expenditures totaled $14.8 million, and depreciation and amortization expenses amounted to $14.1 million. Before turning to the Q&A session, I would like to provide an update on our ESG initiative. In August, we released our first ESG report, which details our policies, initiatives, and performance in key ESG areas for fiscal year 2021. The ESG practices described in the report demonstrate our long-term commitment to sustainable development and social responsibility with the vision of making the world a better place with the power of Weibo. You may visit our IR website to obtain more information of our ESB disclosure. With that, let me now turn the call over to the operator for the Q&A session.

Thank you. Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. Please stand by while we compile the Q&A roster. Once again, to ask a question, please press star 11 on your telephone. Our first question comes from the line of Miranda Zhuang from Bank of America Securities. Please ask your question.

Thank you for taking my questions. My question is about the advertising. Can you share more color on outlook for the S-band in second half? And the measures that you are taking to address the new trend and demand in the brand advertisers that you discussed before and to get more spent amid this weak macro and the COVID uncertainties. Thanks. 那这个问题是想问一下我们的关于这个广告方面在这个下半年的一些这个展望。

As I mentioned before, brands and advertisers have some new trends. What do you plan to deal with? Also, do you have any concerns about the future of the pandemic and the impact of the pandemic on Weibo and Hongguan? Okay, thank you.

In general, if we look at the advertising income structure of Weibo in the second half of the year, we are more than two-thirds of the industry is linked to consumption. For example, FMCG, mobile phone, digital, So in general, if we look at the second half of the year, and if we look at the revenue structure of Weibo, we see that two-thirds of our revenue is related to consumption-related industries. For example, FMCG.

or cell phones, or consumer electronics, and also e-commerce. So those things are highly related to the recovery trend of the macro economy.

In the industry, there are some stimulating policies that are gradually falling. For example, the supply of new energy and the distribution of some consumer goods in some parts of the region. This will have a certain stimulus for the next half of the year. Of course, one is to fall from the policy to the resumption of consumption, and then to the recovery of advertising demand. We still need some time to see. But we think that the big trend of China's consumer market upgrade will continue, and the change in user consumption habits from offline to online will also bring some So currently, I think for part of the industries, there are already some stimulus policies. For example, the NEV industry, and also there have been some issuance of the consumption coupons.

that brings us some stimulation to the macro economy but it takes time for the policies to pass on to the economy for the economy to recover and then it gets reflected in the advertising industry but we still think that the trend of the consumption upgrade will continue and also the habits and behavior of the consumers are already shifting from offline to online and that brings some structural benefit to the advertising industry For example, some of the automotive industry and some other industries are already shifting their strategies, and they are already putting some of their product releases online, and those are very favorable for our industry.

In the current medium-to-short-term market environment, there is a certain recovery in the global economy and consumer areas, but there is a relatively large difference in the speed of recovery in different industries.

So in the mid-term and short-term, of course, the economic recovery trend is real, but the speed of recovery for different industries are quite different.

This is similar to the mobile phone industry in 2020 when the epidemic first started. And we will see that customers will focus more on content marketing from the previous simple brand. For example, we have integrated Weibo to organize the content of media stars in the vertical field to publish marketing content, and then enlarge it through hot searches and topics. In this respect, we will see that we are relatively traditional media.

So actually, since the COVID is here, so we saw that for some of the brands and for some of the advertisers, actually they are shifting their budget from offline to online. For example, the automotive industry, luxury industry, as well as the FMCG industry. we saw very obvious trends from those industries and compared to 2020 when a lot of cell phone brands are actually shifting their product releases especially the new product releases online the trend is quite similar on the other hand for some of the brands actually they are actually investing in certain areas like for Weibo we're very good at taking a media and also gathering the stars and KOLs and try to work up and bring up the social chatter on certain topics. And in this area, compared to the traditional media, we definitely have the advantage over them. So in the second half of the year, we will definitely focus on that advantage of ours. 但是在日化和美妆这些领域,因为二季度疫情,包括三季度的一些部分地的疫情,

The whole of Japan's makeup and e-commerce platforms, in fact, now have a lot of investment in commercial sales and clean storage. In fact, this is not the advantage of this kind of marketing on a platform like Weibo. But at present, our entire users and traffic are still maintaining stability and growth. Our traffic storage and price are still competitive. We are also Okay, so for the cosmetics industry, due to the COVID situation in Q2 and some smaller outbreaks of COVID in Q3,

For the cosmetics and e-commerce industry, actually, they're spending more budget on their promotions and also some other marketing activities to reduce their infantry. So in that area of marketing, actually, this is not our strong suit. But we still have the advantage in our users and our traffic, and those two things are still steadily growing for us. So we do have the advantage in the traffic inventory as well as the pricing of our traffic. So we want to optimize some of our algorithms to improve our outcome in the performance-based ads. And we also would like to help in that area. But for that area of the marketing approaches, actually, it may benefit us in the midterm or long term, but it will not benefit that much for us in the short term.

So in the second half of the year, our strategy is also relatively clear. On the one hand, we will focus on some e-commerce effects, especially some marketing and storage. We will increase the current traffic, increase the investment in advertising quality algorithm, and we will improve the e-commerce effect transformation of our clients on Weibo. But this is not the most important part of our work. The most important part of our work is to continue to enrich our content marketing scene. to enhance our marketing capabilities in the field of commercial advertising, especially in the field of new products. And then, this time, Weibo currently has the ability to operate on the topic and to expand its account. In terms of our client-centered advertising, including the acquisition of brand data, it still has an advantage. This is very important for the competitiveness of our entire Weibo advertising market.

And in the latter half of the year, our strategies are pretty clear. So in the e-commerce performance-based ads and marketing, we would like to improve the efficiency and also improve the algorithm to improve the conversion rate for the customers. But of course, that's not our key in the second half. Our key in the second half is still to improve our content marketing, including the brand plus performance-based ads to improve our capability in that area especially for the brands to release the products and in that area we hope that we can help our customers because we have clear advantage in bringing up the social chatter on certain topics and also we have strong capability to break the circle to really let some of the topics and accounts go viral and we would like to improve in that area.

So from the perspective of the next year, the industry outlook, from the perspective of Weibo, our current industry outlook, on the one hand, we divide it into two categories. In the second half of the year, there will still be new products released, including normal sales industries for customers, such as car, mobile phone, and luxury goods. In this part, you will see that there will be very intensive new products released in the third quarter as a representative of cars. This part is based on the competitiveness of the content marketing of Weibo, we should be able to gain good growth or win the whole market. This is one type of industry. In the second half of the year, some industries will experience something different from usual, such as FMCG and some e-commerce platforms. In fact, in the second half of the year, most of the customer markets are facing greater pressure to store and reduce prices in the current economic situation. Although we have enough traffic flow in the information flow, considering the tone of our users and the long-term value of Weibo's traffic flow, we don't want our users to see low discount, discount, and discount on Weibo. In this respect, we will use some long-term, non-core traffic to meet the customer's marketing needs, but our core scenarios will not be used to do this kind of sale, especially in a selectable consumer market, such as Japanese and American companies. So the recovery of this sector and its growth may be slower in the second half of the year.

So actually, for the latter half of the year, for Weibo, we see several aspects. For the first part, in the latter half of the year, there are still going to be some new product releases for the industries with normal sales. For example, the phone industry, the cell phone industry, the luxury industry, especially the representatives. by the automotive industry in Q3 there will be very dense pop product releases so for our since we have the advantage in content marketing with our brand plus performance based ads we will still see very good growth maybe higher than the industry average but on the other hand there are some other industries like FMCG or e-commerce in the latter half of the year due to the economic situation they will still face some pressure and they want to reduce some of their inventory and they want to conduct some promotions and campaigns so even though we still have very good inventory and our information feed ads and in the but still in order to keep our long-term momentum and also we need to take a look at the taste of our users so we don't want the users to see the discounts everywhere so we would look at the long tail effect But still, we will not sacrifice our core scenarios, especially, for example, for our hardware and apparel industry. For those industries, we still may see a slower recovery.

Okay.

So I think that's it. Thank you.

Thank you. Our next question comes from the line of Ashley Xu from Credit Suisse. Please ask your question, Ashley.

My question is related to our efficiency optimization and cost control. What types of measures would be in place for second half, and what's the financial impact? Thank you.

First of all, you can see that in the second quarter, the operating profit of the entire non-GAAP is about 32%, compared to Q1, which slightly or slightly increased by 3%. This is actually the core. From the beginning of the year, we judged that this year's macroeconomic economy would be affected. Of course, we didn't expect the impact of the epidemic to be so big at that time. We had already done some efficiency reduction measures at that time. For example, In terms of marketing costs, I just mentioned that the market marketing costs have dropped by 27% in the same period as last year, and by 9% in the previous quarter. At the same time, we have optimized the cost of goods for users, which has dropped by 1% in the same period as last year. In this way, the scale of our goods in the second quarter has not changed much, but the quality of goods has been improved. In addition, in terms of product development, there are some edge-type businesses or businesses that have poor cash flow performance, So for Q2, actually, as I've already mentioned, our profit margin was around 32%, which is similar or even 3% higher than that of Q1.

And actually, starting from the beginning of the year, we already foresaw some of the impact from the macro economy. It was just that we didn't expect the impact of the COVID outbreak. So back then, we already started to make some approaches. And actually, our marketing fee actually went down by 27% year-on-year and went down by 9% compared to the last quarter. But still, at the same time, the user acquisition cost for our customers went down by one third. So with similar user acquisition scale, the quality of the user acquisition actually got better. And also for some of our non-core businesses with bad cash flow, we tried to peel them off. And at the same time, we continued to invest in our core business scenarios.

Of course, as I said, we are not only looking at cost optimization from a financial point of view, but more so based on the current company's judgment on the market competition and the trend of the entire industry. In fact, if we now scientifically judge the trend of the epidemic, we have a lot of voices in the market. The epidemic prevention and control will be released and the recovery of the market will rebound very quickly. From a scientific point of view, for the epidemic prevention and control center, for the offline consumption, there is obvious stimulation and release in the middle and short period. It is still too optimistic. So, our current core effect of the whole cost reduction is wrong. In fact, the core is still tight. One is the improvement of operating efficiency. The other is the improvement of the core competitiveness of the company. This is our whole performance. Although the performance is the cost reduction effect, but in fact, from the company's point of view, it is still focused on

So actually, we see that the optimization of our operation efficiency is not just from the financial perspectives. Actually, we do the things based on the judgment of the market competition landscape as well as the industry trend. So if we were to scientifically look at the COVID situation, some may say that the lifting of the control policies may bring benefit to the industry. But in the midterm and short term, we think that that kind of judgment may be a little too optimistic because the outcome was not that optimistic. Actually, for our cost reduction and efficiency improvement approaches, actually we were focusing on two things. One is to improve our operating efficiency. The other is to bring up our core competitive edge. So it may be reflected in our approaches to cut the cost and improve the efficiency, but actually our two targets are to improve our operation efficiency as well as our core competitive edge.

I will give two examples in terms of operating efficiency. I think it is important for everyone to understand the logic behind the thinking of reducing cost and increasing efficiency. In terms of channel strategy, as I said earlier, we have reduced channel costs this year. The market sales cost has dropped by more than 20%. But what we hope everyone to pay more attention to is the ROI of our channel. That is to say, how much time do we have to buy a user and how much time do we have to recover the cost of this user? In the past, we required a year of profit and loss in terms of supply and demand. Because in China, the exchange period of users is about a year and a half. This year, we have increased the investment in this kind of cooperation through the main channels. At the same time, we are doing strategic cooperation for the main channels in terms of products and equipment. At present, most of our channels can recover the cost of supply and demand within six months. This is a separate strategic cooperation channel. For example, mobile phone manufacturers, most mobile phone manufacturers, we can recover our customer cost within three months. This first guarantees the efficiency and profitability of our current channel. But the reason why we do this is that more of the core is still to look at the mid-term trend, which is if the media market goes further down. Then we won't have a loss of investment. In other words, we won't have to cut off some channels because of the reduction in advertising revenue of future users. This time, especially some high-quality channels. But I believe that in the market, many apps can't recover their cost-effectiveness in the exchange period of users. So actually, I can give two examples about the operation efficiency improvement in respect of our approaches to cut the cost and improve our efficiency.

So for our channel strategy, actually, as I said before, in marketing expense and in channel cost, we reduced by 20%. But actually, at the same time, we improved the channel ROI by a lot. So that means for one RMB spent on the users, how much time it takes for us to get that cost returned. So the normal payback time for us in the past was one year, because we know that the cycle for the users is 1.5 years. But now, for the key channels, we actually invested even more in the key channels and we conducted some strategic cooperation with very important channels as well so now actually the payback time is just six months and for some of the very special channels like for cell phone the payback time is just three months so actually the efficiency is much better and Actually, it's not just about improving that efficiency. Actually, we're looking at the mid and long term of the industry because even if the industry go bad, we wouldn't have to worry about the negative ROI. Or in other words, even if the economy gets worse, we won't have to give up certain channels because of the bad ROI because we already have very short payback time. And for other apps, actually, normally they cannot get the cost back within a user cycle. So that means we have the advantage. And afterwards, if the economy gets better, then that means for us we can easily increase our user base with very good quality user acquisition. And that means we can even improve our margin even better.

At the same time, in terms of our core performance improvement, for example, I just mentioned that in some areas where the core advantage of the company is obvious, we have focused more on investment. For example, in SMEs, such as games, e-sports, and sports, including news and information, we have also increased the content and business cooperation with various official media this year. Especially, we have more content marketing modes with official media to form mutual benefit and mutual benefit marketing services. to the media that this year's revenue can be several times that of last year. At the same time, as I just introduced, this has also made it possible to strengthen the content marketing of our Weibo, so that we can have a better relationship with other platforms in terms of content marketing and product marketing. For example, overall, in terms of investment, in terms of our core competitiveness, we will definitely increase our investment in this aspect in the second half of this year.

And at the same time, we also have some other approaches in our core competitive edge. For example, for the verticals that we have advantages in, for example, the gaming industry, esports, sports, and the news and information. Actually, we are cooperating much better with the official media platforms. and we took advantage of our content marketing so that we can offer very mutually complementary solutions to those media platforms so we actually multiplied their income several times compared to the previous year and at the same time the cooperation also benefited us because that adds to our advantage in our content marketing so compared to other platforms we are more differentiated and we get the endorsement of the official platforms. So that adds to our core competitive edge. And in the latter half of the year, we will definitely continue to invest more in those areas.

So in the next half of the year, our core strategy is to reduce the cost-effectiveness. The core is to reduce the cost-effectiveness so that our entire team, including product development, to put resources into those channels that can improve efficiency, including cooperation and content areas. From a profit margin perspective, we still want to maintain the current profit margin level. From a long-term perspective, Weibo has also maintained a profit margin of most of the industry. We will continue to insist on high quality and high efficiency growth. so in the latter half of the year in respect of our core competitive edge actually we are using the cost reductions to help our teams especially the r d teams to focus on areas where we have we where we can improve the efficiency

and where we have the advantage. For example, we can generate more cooperations with more platforms and also we can improve our content marketing. So in respect of our margins, we are trying to maintain a similar level to the previous credit line and the previous level. And in the long term, we are always aiming at a higher gross margin level compared to our industry peers. And we are trying very hard to maintain high quality and high efficiency growth, as well as a very steady gross margin and cash flow levels. So those things are very important in a market condition such as right now. So with all those approaches, we aim to have more flexibility financially.

All right. Thank you very much for your questions. We have now reached the end of the question and answer session. I'll now turn the conference back to Ms. Sandra Zhang for closing remarks.

Thanks, operators. Conference call today. Thank you for joining us. We'll see you next quarter.

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