Weibo Corporation

Good day and thank you for standing by. Welcome to Weibo report third quarter 2022 financial results conference 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. I would now like to hand the conference over to the company. Thank you. Please go ahead.

Thank you, Operator. Welcome to Weibo's third quarter 2022 earnings conference call. Joining us today are our Chief Executive Officer, Gaofei Wang, and our Chief Financial Officer, Faith Hao. The conference call is also being broadcasted on the internet and is available through Weibo's IR website. Before 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 four 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. We will assume no obligation to update the forward-looking statements in this conference call and elsewhere. Further information regarding this and other risks is included in WAVE's annual report on Form 25. and other filings with the SEC. All the information provided in this press release is occurring as of date hereof. WABR assumes no obligation to update such information, except as required under applicable law. Additionally, I would like to remind you that our discussion today includes certain non-GAAP measures, which includes 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 and are non-recurring in nature, are not indicative of our core operating results and outlook. Please refer to our press release for more information about our non-GAAP measures. Following management prepared remarks, We'll open up the lines for a brief Q&A session. With this, I would like to turn the call over to our CEO, Gao Feiwang. Thank you.

Hello, everyone, and welcome to Weibo's third quarter 2022 earnings conference call.

On today's call, I will share with you highlights of Weibo's user product and amountization in third quarter of 2022.

On the user front, Weibo's MAUs reached 584 million

and average DAUs reached 253 million in September 2022, adding approximately 11 million and 5 million users year-over-year respectively. In September, 95% of Weibo's MAUs came from mobile.

In terms of commercialization, the overall advertising market was affected by the macroeconomic and consumption factors. In the third quarter, the advertising market, customer budget, hair, and people remained relatively cautious. In the third quarter, the total revenue reached 4.54 billion US dollars, and the annual decline was 25%. 1% growth in sales, 1% growth in sales, 1% growth in sales, 1% growth in sales, 1% growth in sales, 1% growth in sales,

On monetization, with macroeconomy and consumption weighing on the overall advertising market, our clients remain cautious towards their advertising budget spend. In the third quarter, our total revenues reached $453.6 million, a decrease of 25% year-over-year and an increase of 1% quarter-over-quarter, excluding the foreign exchange impact. Our total revenues decreased 20% year-over-year and increased 5% quarter-over-quarter. Ad revenues reached 393.4 million U.S. dollars this quarter, and 95% of our ad revenues came from mobile. This year, we have focused on improving our operating efficiency. In the third quarter, our non-GAAP operating income reached 162.1 million U.S. dollars. representing a non-GAAP operating margin of 36%, up from 32% last quarter. Next, let me share with you our progress made in product monetization in the third quarter. Our target on-product operations still focus on strengthening the platform's competitiveness through improving operating efficiency, maintaining large user scale, and enhancing user engagement.

This quarter, due to the heat and heat wave, Weibo's overall traffic reached its peak in August. Traditionally, the beginning of September will have a certain impact on traffic, especially this year because of the epidemic, we can't promote activities in the campus. In this quarter, with the summer holiday season and hot trend effect, our overall traffic reach its peak level in August this year. Based on our experience,

The opening of the fall semester in September usually negatively impacts our traffic, especially when campus promotions suspended this year due to COVID-19 related control measures. In response, on the product and operational front, we have stepped up our efforts in the areas of channel investment, community product optimization, and cultivation of entertainment and esports verticals, which resulted in healthy trend of our overall traffic in September.

In terms of channels, the three-week channel ROI level continues to increase. We are continuing to focus on the head of the Youzi channel, while further strengthening cooperation with mobile phone manufacturers and social media products. This quarter, we have already realized the full coverage of Weibo hot products in the core field of domestic head companies, and we will also combine the content of the manufacturer's attributes and user scenarios to continue to optimize the website. Enhance the consumers' interest in Weibo's social media, and further improve the services of our mobile phone users. In September, On the channel front, the ROI of our channel investment for the third quarter was further improved. We continue to strengthen our cooperation with Tencent manufacturers in Weibo's top trends and social products.

while focusing on investing in hard ROI channels. This quarter, we achieved full coverage for Wave with hot trends content in the core positions on handset devices of domestic leading manufacturers. Meanwhile, we further upgraded our service for domestic smartphone users and enhanced their consumption through improving the quality of hot trend content, considering the handset attributes and users' consumption scenarios. In September, the number of our hot trend users from domestic handsets increased 30% quarter over quarter. Next, we will continue to deepen our cooperation with handset manufacturers to focus on long-term mutual benefits, expand cooperation to more of Weibo's core products and content, and increase Weibo's user scale through handset tech channels.

In terms of social activities, we continue to enhance the social nature of our products. to increase the scale and activity of core user groups. In September, on the basis of the stability of traffic flow, the interaction efficiency has maintained growth, and the social yearning of users has been further strengthened. In July and August, it is the peak of local traffic flow. The production of content such as stars, dramas, games, etc. has been greatly improved. The traffic flow for these major users' young and yearning characteristics has been supported by the key traffic flow. At the same time, it has also improved the consumption and interaction of users in the traffic flow. At the same time, we continue to optimize the traffic flow structure of the traffic flow in this quarter, further enhance the distribution of KOL and community content in the relationship network, strengthen the social nature of the relationship network, especially for community content. The relationship network algorithm has made major adjustments and optimizations to better promote the integration of community content and account content. Currently, nearly 70% of relationship users can directly consume the high-quality community content they are interested in in the relationship network. In September, the traffic and interaction of community content in the relationship network increased by more than 50% in June. This has definitely improved the performance and interaction efficiency of users in the relationship.

We both content generation largely increased, particularly for verticals such as celebrities, TV series, variety shows, and games, etc. We leaned our traffic distribution towards these verticals with strong thickness of young users in the relationship-based feed, which helped enrich the vertical content ecosystem and enhancing user interaction and consumption in relationship-based feed. In the meantime, we'll continue to improve the distribution structure of our relationship-based feeds, further increase the distribution of content generated by KOLs and community-based content to emphasize the social features of our relationship-based feeds. In particular, we'll make significant upgrades in algorithms to enhance distribution of community-based content, further integrating the community-based content and user-generated content. As a result, in the relationship-based feed, 70% of users were able to consume quality community-based content of their interest directly in the feed. In September, traffic generated from community-based content distributed in the relationship-based feed and the number of users who made interactions through community content has increased more than 50% quarter over quarter. which further facilitates users' relationship building and interaction efficiency in a relationship-based system.

In addition, this quarter, we will continue to increase our investment in community products and strengthen the perception of current users of community products. On the one hand, we will prioritize the content of the community independent consumption scene that will be released in June, which is in line with the head-up criteria, as well as effective recovery measures to strengthen the community's new users' recovery mentality. In September, The daily user size of the independent consumer market in the community has increased by more than 50% in June, half of which is new users in the community. Not only has the size of the community increased, but also the consistency of users' consumption has increased significantly, and the human consumption has increased by 40% in June. On the other hand, for community products, their own functions and mechanisms are not only perfect, but they have updated more body and interaction play methods, improving the consistency of users in the community, and obviously bringing in the culture, games, community quality content production and interaction. In the third quarter, we'll continue to beef up our investments in community products to strengthen the perception of community products by all users. On the one hand,

With the independent tab of Super Topic at the bottom of the main page launching in June, we are able to improve new users' willingness to revisit the tab through prioritizing traffic distribution for quality community content, coupled with our effective user recall strategy. In September, the DAU's Super Topic tab increased by more than 50% compared to that of June, half of which were new users for community products. Not only has the scale of users grown, users' consumption sickness increased significantly, with per capita consumption of community-related content increased by 40% from June. On the other hand, we further enhanced functions and the mechanism of the community products, such as new functions of posting and interaction that launch in the third quarter. The increased user thickness in the community significantly drove the production and interaction of quality content in entertainment and online gaming verticals. In September, the number of users who posted and interacted in the community continued to grow double-digit compared to June, while the number of posts and interactions increased twice the increase of users. We believe that the constant building of our community products has strengthened the social stiffness of Weibo users, building well for the long-term healthy development of the platform.

In terms of content and ecosystem, our current strategy is to focus on developing social media accounts and key vertical areas. By strengthening the competitive advantage of our key areas and high-end accounts, we will promote the improvement of platform operation efficiency. In the game area, we will continue to upgrade the e-sports competition in the third quarter, and further strengthen the social cooperation between Weibo and key e-sports teams and platforms. The number of Japanese troops in the third quarter has increased by nearly 50% in the second quarter, and the flow and interaction have increased by threefold. In addition, the number of Japanese troops in the third quarter has increased by nearly 50% in the third quarter, and the number of Japanese troops in the third quarter has increased by nearly 50% in the second quarter. While we are helping the team to improve its influence and professional value, we have also gained a lot of coverage for the new year, and the total return has been increased. In the field of the program, and once again showcased the platform status of Weibo in the promotion and discussion of文娱 works. Next, we will also actively cooperate with partners to promote the healthy development of文娱 works.

On content front, our strategy this year is to focus on developing social accounts and key verticals to constantly solidify our advantages in key content verticals as well as high-quality accounts and thus drive the improvement of operating efficiency. In terms of the online gaming workflow, with further cultivates our ecosystem around esports events and deepened cooperation between Weibo and top esports clubs. In third quarter, the daily number of posts by esports players has increased by 50% quarter over quarter, with both traffic and interactions doubled. Coupled with tournaments related hot trends, the overall traffic from the esports vertical grow over 50% sequentially, but have also attracted a wider group of young users and generated higher user engagement while helping esports clubs build up influence and market value on our platform. As for the entertainment industry, the summer holiday was the peak season for TV series and variety shows. We focused on partnership with video platforms and show producers to improve distribution of hot trends and user interactions, driving the volume of blockbusters to grow across the platform. In third quarter, the traffic and interaction of TV and variety shows continue to trend up compared to that of the last summer holiday. In particular, the traffic for TV shows has reached record high, which more than doubled compared to the same period last year, with multiple phenomenal project simmers TV shows Love Like the Galaxy and Love Between Fairy and Devil have generated over 40 billion topic views and 28 million discussions, reinforcing Weibo's position as a designated platform for show launching and promoting. Going forward, we will continue to actively support our partners and drive healthy development of the entertainment ecosystem.

Next, let's talk about the progress of commercialization. Advertisement for customers in the third quarter has been restored in the second quarter, but the recovery rate of different industries presents different trends. For example, in the automotive industry, the support of policy for new members of the automotive industry and the comprehensive marketing plan for the launch of new cars on Weibo in the past two quarters have improved the recognition of the automotive industry customers. 90% of the new design releases will choose to cooperate with Weibo for more in-depth product promotion. In addition to the conventional brand exposure, Chinese media can also cooperate with the theme combination model. Weibo has successfully expanded the market atmosphere in the field of new car releases, which has led to a growth in the advertising revenue of the 3G industry and the car industry, and maintained the same double-digit growth. For example, in the设置品 industry, because of the 3G new product big sale and release, the advertising revenue has increased significantly. In addition, in the game industry, in the past two years, we have established a standardized marketing model that has gained the recognition of game customers. Although this year, due to the number of games, the new game market has shrunk, However, our customer-developed content cooperation for the first game has launched cutting-edge marketing products and services, helping these game manufacturers to effectively improve the user up and life cycle, get the corresponding factory budget, and stabilize the position of Weibo as a game promotion platform. Other industries, such as the fast-selling industry, have been affected by the rest of the factors, such as the crisis of the first wave and the decline of sales, and the customers' brand investment attitude remains market-oriented. The e-commerce platform, mobile phone digital industry, etc. are also affected by the overall market environment and the industry itself.

Moving on to monetization. In the third quarter, we saw a general recovery trend of expense on a sequential basis with various impacts across different industries. For example, in the auto industry, thanks to policy support for new energy vehicles industry and enhanced market recognition for Wave's integrated new car launching marketing solution for automakers over the past two quarters, Weibo's in-depth product launch and marketing solutions attracted over 90% of the overall new model launches. On top of regular brand exposure, leveraging the combo of media, vertical KOLs, and hot trends, Weibo has successfully expanded its market share in new car launches, leading to sustained double-digit year-over-year growth in ad revenue from auto industry in the third quarter. As for the luxury sector, Ad revenues also booked significant year-over-year growth due to the intensive launch of new lines and shows in the third quarter. In terms of online gaming industry, our differentiated marketing model that we have established over the past two years has resonated greatly among game developers. Even though the new games approval this year has shrunk, we have effectively helped these game developers improve user output and lifecycle leveraging cooperation around content with our top tier game clients and event-based marketing products and services. As a result, Weibo has gained certain ad budgets and further solidified our market position among advertisers in the online gaming sector. Other industries, such as the FMCG industry, continue to be impacted by headwinds of COVID-19 control measures and weak consumption measures. with brands taking a wait-and-see attitude in their branding budget allocation. E-commerce platforms and 3C products also experienced varying degrees of decline in the third quarter due to market conditions and the industry's slow season.

From the current market conditions and the overall advertising industry in the first half of next year, the overall market environment is still uncertain. But at the same time, we also saw a signal of slow growth in some industries. At this 21st trade fair, e-commerce platforms and fast-selling customers have set a certain level of budget release. Although today's double business organizing time has been shortened last year, but at present, Weibo's budget from e-commerce platforms has been steadily increased since last year. This quarter, our advertising product development has also made important investments in the accuracy of e-commerce investment data. I look forward to the fourth quarter to gradually gain a certain scale of effective advertising budget in the customer base. The fourth quarter is also a key period for the release of new products in the mobile phone industry. We see that all major mobile phone manufacturers have key marketing nodes for new releases. We are also actively organizing content marketing plans with customers to further strengthen the market share of Weibo's new releases. In addition, the fourth quarter's World Cup is also a key target for many customers, especially food and beverage customers. We are currently discussing the World Cup hot spot marketing plan with customers to deeply combine content and marketing, strengthen Weibo's main hot spot marketing model, and improve customer marketing performance and profit.

Talking about outlook of overall advertising business for the fourth quarter and the first half of next year, there is still relatively high uncertainty under the market circumstance. However, we are pleased to see positive signals with certain industries. For example, e-commerce platforms and FMCG clients have released ad budgets during the Double Eleven Shopping Festival to various degrees. Although the Double Eleven Shopping Festival was shorter this year, ad budget from e-commerce platforms returned to a growth trajectory compared with the same period last year. In third quarter, we focused on conforming our algorithm to accurately fulfill the marketing needs of e-commerce platforms on the ad product front and expect to gradually capture certain advertising budgets in the fourth quarter. Meanwhile, the fourth quarter is also a key season for new product launches in the handset sector, with all major handset manufacturers launching key models in their pipeline. As such, we are actively working with our clients to develop content marketing plans to further beef up Weibo's market share in new phone launches. Moreover, the 2022 World Cup in the fourth quarter will be a key advertising window for many of our clients, especially in the food and beverage sectors. We are cooperating with clients and discussing their content marketing plans in details to tap into WorldCop-related hot trends in the hope of enhancing ad performance and ad wallets.

Finally, I would like to briefly talk about the progress of Weibo in this quarter's downfall. As we mentioned in the previous report, this year, we have done a stricter ROI control in terms of cost efficiency, and adopted a series of effective downfall efficiency measures. In 2019, these measures were further developed and achieved good results. In the third quarter, in the case of overall income pressure, we have adjusted the operating profit rate to 36%, which is 32% of the second quarter. The operating profit rate has been increased by 4 points, which fully reflects the effective implementation of our cost-efficiency strategy, and has further improved the efficiency. Through continuous effective cost-efficiency measures, we have the opportunity to focus on areas where resources have more potential to develop. For example, on the channel, through strategic channel cooperation, we may be able to reduce the ROI return period of more GALF users, At present, we have reduced most of the cost of return to the market twice as much as we did last year. In terms of product operation, we have expanded our cooperation with content strategic cooperation partners, focusing on social products, and improving the advantages of e-sports, e-sports, and sports in the focus area. This year, we have achieved content and users in collaboration with video websites, mainstream media, e-sports teams, and other strategic cooperation. This may have some cost in the short term, but it will significantly increase our competitiveness in content operation, It also improves the efficiency of the entire platform. In terms of business, we are following the market trend. Increase customer content, use marketing to strengthen the advantage of the market and diversify the competition. At the same time, the focus is on the precise algorithm matching of e-commerce and input demand. Entering the fourth quarter, we will continue to implement the current cost-benefit plan. At the same time, we will pay special attention to the overall cost structure to make adjustments and further optimize various resource pairs to make it possible for the company to operate efficiently under uncertain circumstances in the red-light environment. We believe this will help Weibo maintain its long-term efficiency.

Now, let me briefly recap on Weibo's progress in our initiative to optimize costs and improve operating efficiency. As mentioned in our last earnings call, we have taken a series of effective measures to optimize our cost and expense structure and enhance efficiency during the year to better control our ROI on the cost end. These measures continue to bear fruit, leveraging our solid execution. In third quarter, we delivered a non-GAAP operating margin of 36%, up nearly 4 percentage points versus 32% in the second quarter, benefiting from solid execution of discipline spending strategy to further improve operating efficiency. This has demonstrated our improvements in operating efficiency, giving us the opportunity to lean our resources towards more potential areas. Taking channel investment as an example, through strategic channel cooperation, we acquired more high-up users and thus shortened the ROI retrieving period of channel investments. Currently, the cost retrieving cycles of most of our channels shortened to nearly half of that in the same period last year. On the product operation front, we deepen the strategic cooperation with our content partners, focus on social products, and strengthen our advantages in hot trends and key verticals, such as esports and sports. We built strategic partnership with video sites, mainstream media, and esports clubs this year to acquire more content and users. Despite potential costs incurred in the short run, We could significantly enhance our competitiveness in content operations and improve the operating efficiency of the platform's traffic. On the ad product front, for one thing, we will tap into market trends and beef up our investments in content marketing to strengthen our differentiation. For another, we focus on delivering breakthroughs in accurate algorithm adaption to capture e-commerce ad budget. Looking into the fourth quarter, we will continue to execute against our strategy of reducing costs and improving efficiency, with more focus on adjusting our cost structure and optimizing resource allocation to ensure efficient operation of our company amid high uncertainty of macro environment and solidify our long-term competitiveness.

Next, let me introduce to you Cao Fei, the CEO of Sanji Group.

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

Thank you, Gopi, and hello, everyone. Welcome to Weibo's third quarter 2022 earnings conference call. Let's start with user metrics. In September 2022, Weibo's MEUs and average DEUs reached 584 million and 253 million, respectively, representing a net addition of 11 million and 5 million users respectively on a year-over-year basis. We are pleased to see healthy engagement trend and video consumption, despite the back-to-school seasonality and ongoing disciplined channel marketing strategy demonstrating Weibo's core value proposition to users. Turning to financials, As a reminder, my prepared remarks would focus on the gap results. All monetary amounts are in U.S. dollar terms, and all the comparisons are on a year-to-year basis, unlike otherwise noted. Now, let me walk you through our financial highlights for the third quarter of 2022. We were third quarter 2022 net revenues were 453.6 million, a decrease of 25%. or 20% on a constant currency basis. Operating income was $162.1 million, representing an operating margin of 36%. Net income attributable to Weibo reached $119 million, representing a net margin of 26%. Divided EPS was $0.50 compared to $0.90 last year. Now, let me give you more color on revenues. WebOS advertising and marketing revenues for the third quarter 2022 reached $393.4 million, a decrease of 27% or 21% on a constant currency basis, deflecting a tad bit of advertising market as we expected. Mobile ad revenues were $372 million, contributing approximately 95% of total ad revenues. With COVID resurgence and micro-highways, mainly on the overall demand side, our advertising business continued a descending trajectory year-over-year, while booking a moderate sequential growth during the quarter. Our leading verticals in terms of ad revenue contributions in the third quarter were FMCG, 3C products, and online games. In terms of growth, the luxury and the automobile sector exhibited a solid recovery trend, booking double-digit growth both on an annual and sequential basis. Benefiting from tailwinds of the electronic vehicle industry, policy stimulus for the automobile industry, and an eventful product launch season for luxury brands, we beefed up sales efforts to capture high-value share in these sectors with our full spectrum of social ad solutions. The online game sector also demonstrated relative resilience as our brand plus performance ad offerings resonated greatly with game developers. On the flip side, discretionary consumption categories and the e-commerce sector remained sluggish amid weak consumption sentiment. lukewarm sales data and broad-based initiatives to optimize costs and expenses among our customers. From the ad product perspective, promoted fees continued to be the largest part, followed by social display ads and search and topic ad offerings. In light of industry-wide pricing pressure and ad execution challenges, We proactively took the window to optimize our ad technology and product in the hope of capturing more performance-driven ad budget, which is more defensive in the current market condition. Meanwhile, we have steadfastly focused on highlighting our market differentiation as well as further tapping into the visualization trend of the ad market. Entering the fourth quarter, we are seeing signs of advertising market bottoming out in a more moderate and gradual pace. That said, leveraging the upcoming e-commerce festival, we will beef up our product and sales execution to capture the potential pent-up market opportunities while navigating through many heavens in the near term. 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 third quarter were $15 million, a decrease of 28% or 22% on a content currency basis, which is generally in line with our overall advertising business performance. Value-added service, VAT revenues, were $16.1 million in the third quarter, a decrease of 14% or 8% on a constant currency basis. The decrease of VAT revenues was mainly due to less revenue contribution from membership services. Turning to costs and expenses, total costs and expenses for the third quarter were $291.5 million. a decrease of 19% as we implemented our efficiency initiatives to stabilize earnings. The decrease was across each cost and expense item. Thanks to ongoing stringent cost control measures on various operational fronts, especially disciplined channel investments and reduced offline activities. Operating income in third quarter was $162.1 million, representing operating margin of 36%, improved from 32% in the second quarter. Our margin performance has exceeded our expectation, as our cost optimization initiatives continued to bear fruit, despite COVID headwinds and the macro challenges. Turning to income tax, Under that measure, income tax expense for the third quarter was $19.8 million compared to $31.4 million last year. Net income attributable to Weibo in the third quarter was $119 million, representing a nice margin of 36% compared to 34% last year. Turning to our balance sheet and cash flow items, as of September 30, 2022. Reward cash, cash equivalents, and short-term investments totaled $3 billion, compared to $3.1 billion as of December 31, 2021. In the third quarter of 2022, cash provided by operating activities was $74 million. Capital expenditures totaled $4.6 million, and depreciation and amortization expenses amounted to $13.2 million. Before turning to the planning session, I would like to provide an update on Share Reporters Program. Under the Up to 500 Million Share Reporters Program authorized in March this year, we have repurchased a total of approximately 3.1 million ADIs for a total cost of $157.7 million as of September 30, 2022. as means to return value to shareholders amid a turmoil market. With that, let me now turn the call over to the operator for Q&A session. Thank you.

Thank you, management. As a reminder, if you'd like to ask question at this time, please press star one one and wait for a name to be announced.

One moment for the first question. First question comes from the line Alicia Yup from CT.

Please proceed.

Hello, thank you. Taiwan Taiwan Taiwan So thanks for taking my questions. I have a question related to the advertising outlook and sentiment in the fourth quarter as well as into the 2023. Given, you know, the stricter COVID policy and also the weakness in the macro, how should we think about the growth rate as comparison to the third quarter in terms of the declining magnitude? Will the 4Q year-over-year decline be bigger steeper than what we saw for the third quarter. And then as we go into 2023, can management also kind of split in terms of preliminary view for the first half versus the second half growth? How should we think about whether the first half should be more conservative and then second half we should see some resumption of the growth? Thank you.

First of all, talking about the four seasons and the year 2023, one is that if we look at Weibo's revenue structure, we are probably more than 3.2% of the industry is actually related to consumption, such as FMCG, mobile phone CNC, and e-commerce. So our entire advertising revenue recovery rhythm is basically related to the overall PR economy and consumption.

All right, thank you very much for this question. So with regards to the Q4 and also the 2023 performance, so you can see, first of all, I'd like to talk to you about the structure of our advertisement. So two-thirds of the industries are actually related to consumption, for example, FMCG or 3C products, as well as the e-commerce. So you can see that the recovery speed is high related to the macro.

If we look at the fourth quarter, a drop of the same ratio is definitely smaller than the third quarter, and the ratio should be able to maintain growth. However, the situation of the fourth quarter is indeed different from the third quarter. In terms of different industries, the trend of many industries has changed significantly. One is that in October, many customers, because everyone knows that there are some There are some activities in the country, so many offline activities of customers have been suspended. So October will actually have a bigger impact. But we will look at the double 11 time and double 12 e-commerce nodes this year. We now see a lot of e-commerce platforms and fast-selling customer budget release. In addition, we will see that the World Cup will soon be held. We will also strengthen the sales of our customers in Weibo in the World Cup. We will see that our income in the World Cup may not be much different from that of the Beijing Winter Olympics.

So, next of all, I would like to talk to you about the performance. So, you can see that we're going to narrow in the kind of trend in Q4 and also going to realize a quarter-over-quarter improvement in the future. And also, now, I would like to talk to you about the situation. So, as you can see that talking about some of the offline scenarios and also some of the offline activities, So in October, we had a lot of activities and also events organized by national institutions so that we've got some suspensions of the offline activities organized by our customers. So we had a big impact in October. However, you can see that talking about the e-commerce, they had actually great improvements because of the Double Eleven Shopping Festival and also the Double Twelve Shopping Festival as well. So that's especially talking about the FMCGs. So they're going to allocate more budget actually in these two events timeframes. And also the overall trend will be upward. Also, last year we had a very special category, which is the live stream e-commerce. And due to certain reasons, they had actually a big decline in terms of this particular, this year's performance. And also the next one is that talking about the Q4, on the overall basis, the overall category of e-commerce will be experiencing a very stable trend. And also, talking about the World Cup, we can see that a lot of budget is going to be allocated with us in the World Cup. So that's especially FMCG. So that is to say that we're going to receive the same budget of the FMCG medication of their advertisements in the World Cup session, which is quite equal to the session of the Winter Olympics.

The 23rd year is still early. Recently, we have seen some policies on the optimization of the epidemic prevention and control of the country, including some policies on real estate and other economic industries. Of course, I will see these policies gradually landing and leading to the recovery of consumption and the recovery of advertising demand. We think it will take a certain time. In the last quarter, I also talked about If the epidemic is released, consumption may not recover quickly in the short term. At present, the trend we see is that there will still be some pressure in the second half of the year, especially in the first quarter. In fact, the first quarter of this year and the first quarter of 2022 did not have much impact on the epidemic. However, I will see that the rhythm of sales with customers in the second quarter or the second half of 2023 we will see a lot of customer engagement, including product promotion plans, which will still recover more significantly. We believe that the market will remain in a state of growth.

So now I would like to share with you some of the colors. Like, for example, if we're talking about the new COVID control policy, especially the new 20 items that are issued by the government in controlling the COVID, and also some of the similar policies towards the real estate industry, we are able to see a very good recovery of the consumption side. But that is to say that, having said that, we are still hoping that it will take time to recover. And also, even if we are having a fully open market after the COVID control, still, it will not generate the recovery immediately. And I believe that is going to be the case and still take time to recover. And also, the next point I would like to talk to you about is, you know, I'm talking about the first half of the next year. Still, we're going to experience some of the stress. in terms of the advertisement market. And also, in 2022, in Q1, we did not have any impact, actually, from the COVID-19. And also, however, if you're talking about the marketing activities and also some of the allocation of the budget and in terms of the product promotion, for example, we're going to see a very good situation in the Q2 of 2023 and even in the second half of 2023. So there will be an upward trend.

Okay. Yes. So if we look at next year's operating period, on the one hand, I will strengthen our investment in the effect advertisement, especially in this investment, in fact, in the fourth quarter of this year, we have already seen some results. At the same time, I will see that many customers, in fact, in such a time rhythm, their new products will be released, although the rhythm will drop, but Weibo the number of customers in the new product release is rising. Whether it's in luxury goods or in cars, the number of customers in the new product release and the number of customers in the customer budget are all rising. Thirdly, in these two to three seasons, we will continue to reduce our costs and increase our cost structure and maintain our competitiveness. Thank you.

And also, lastly, I would like to say that if you're talking about the next year, so you can see that more people and also more customers are going to allocate their budget, especially on the performance-based ads. And also, even if we are seeing that the slowdown of the new product launch, but still, we are seeing that more customers are actually choosing our platform as their kind of platform to launch their new product. And also, the new product launch percentage against the rest of the other budget is increasing, especially that is quite obvious in the industry of luxury products and also the automotive as well. So third point is that in the next several quarters and also the next year, we're going to still focus on the cost reduction as well as the efficiency improvement. So we're going to have a very better of situation in that. Thank you.

Questions? Next question comes from the line of Thomas Chong of Jefferies.

Please proceed. Thomas, your line is now open. Please proceed with your question.

我们应该怎么去理解DC季度还有明年我们这个利润率的一个展望 还有就是我们赚本增销的一些计题的战略 Thanks management for my questions. We have been seeing the cost optimization strategies of emphasis on ROI is executing quite well. In particular, we are seeing that effect in our operating margin. May I get some more color about our strategies in 2023, our strategies in cost optimization, and how should we think about Q4 margin trend, as well as next year margin outlook, as well as the measures that will be undertaken next year. Thank you.

Thank you. As I said in the screen, in terms of the third quarter, one of the marketing costs is market marketing. We continued to optimize the marketing costs, and at the same time, we also optimized in terms of production and operation. At the same time, I think there are some technical factors in the third quarter, because in the second quarter and the third quarter, we planned to have some offline activities. Maybe because of the epidemic, This will be in the fourth quarter and will be held next year. These activities, in terms of ROI, can basically maintain a level of 1 to 2. But in this case, this is also a reason why some of the margins in the third quarter will be increased by a second quarter. Because many of the activities in the third quarter have not been held due to the epidemic. This is a situation in the third quarter.

All right. So thanks for this question. Actually, I've been stated quite briefly in the script that is to say that in Q3, we've been keeping optimizing some of the expenses, for example, marketing and related to R&D and also operation as well. We've been had a lot of optimizations. And also in Q2 and Q3, due to the COVID management and control policy, a lot of our offline events actually did not have or did not successfully hold. So, we are going to move and delay them into Q4. And also, the ROI of this offline event will be around 1 to 2 or so. So, that is the reason why we're having a slight higher margin in Q3 than at all Q2. Okay.

From Q4, or let's say next year's profit and loss, in the current market environment, as I just said, in the first half of next year, Because of the economic policy and the situation of this epidemic, we think there is still a relatively large uncertainty. So we will be more determined to implement this plan to reduce the cost-effectiveness, especially in terms of the overall cost structure. We will make some adjustments, especially in terms of market sales and human resources. Based on the core competitiveness of the company platform, we will do some concentration. This is also very important for us to strengthen the market competitiveness of Weibo. If you follow Weibo for a long time, you will know that in the past five years, from 2017 to 2020, our operating costs and expenses can be controlled at about 60%. In 2020, because we invested in some new businesses, the proportion has risen to 65%. In the first half of this year, due to the decline in revenue due to the impact of the epidemic, such a proportion has actually increased further. We think that the social media platform positioning of Weibo is still unsatisfactory. In the future, we will focus on the characteristics and advantages of promoting Weibo platforms, and while improving Weibo's competitiveness and developing new business, we will optimize our cost structure and return our financial efficiency to a reasonable level.

So also, if you're talking about the next year and also Q4 as well. So there are a lot of uncertainties in terms of the control policy of COVID as well as economic policies as well. So especially in the first half of next year. So that, of course, we're going to further reduce the cost and also optimize the cost as well as improve the operational efficiency and also do a lot of work in terms of the optimization of our cost structure. For example, we're going to further concentrate and also doing more optimization works related to the expenses of marketing and also labor and human resources as well. So that's how we're going to improve our core competence by doing that. And also, if you're a very senior investor and following Weibo for a very long time, you should be knowing the story about the five years before. So from 2017 to 2020, we had about the operational costs which was about 60% against revenue. And also in 2020, because of launch of new operational events and also businesses, this particular figure improved to about 65%. And also in 2022 first half, because of the reduction of the revenue, this particular figure is going up further. But we don't think that this is actually quite in line with the positioning and also the core strength of Weibo as a social media platform. So in the future, we're going to really focus on advantages and also the key characteristics, as well as further improve our core competence and then having a better officer situation by doing a lot of further more works on the optimization of our cost and also cost structure so as to improve our operational efficiency further. Okay.

So I think from the perspective of the fourth quarter, because some of the activities of the second and third quarters will be held in the fourth quarter, so the profitability of the fourth quarter may not reach 36% as high as the third quarter. It may be similar to the previous quarter. But in 2023, we hope that compared to 2022, we can maintain a steady improvement in operating profitability. Of course, this is an improvement. We will still maintain our investment in core technology, and at the same time, we will maintain the flexibility of our new business. From a long-term perspective, we still need to balance our growth and investment relationship at the stage of market fluctuation. We will especially pay attention to maintaining the production capacity of a more stable cash flow and strengthen our flexibility in finance. Thank you.

So lastly, I would like to say that in Q4, as I have already stated, most of the offline events that should have been happening in Q2 and Q3 will be moved to Q4 so that we're not going to see as high operational margin as the previous quarter. But I think that this should be quite similar to Q2. And also in 2023, of course, we're going to have a very stable plan for the growth of our operational margin. and also really emphasize more, of course, on the investment to improve our core competency, as well as launch most of our new businesses. And also, in the long run, while the market is fluctuating and also uncertain, definitely speaking, we have to keep a very good balance in terms of our development and also investment as well, and also generate quite robust cash through all those means and also having a very good flexibility on our financial performance.

Thank you for the questions. In the interest of time, the last question comes from Timothy Chao from Goldman Sachs. Please proceed.

Q&A Q&A Q&A the company is investing to, and what is the management outlook for VAS revenue potential going forward? Thank you.

First of all, in terms of transformation, although we have a VAS business, but for Weibo, in terms of the influence of social media in terms of our traffic flow, the advertising model is one of the most efficient products in our current transformation. Especially, as I mentioned just now, an advertising product like Weibo is a must-have in our customer market, especially for new releases. But we also see that the advertising model will sometimes be affected by competition and the fluctuation of the customer market, which will cause us to have some negative pressure on the flow of this transformation price. At this time, we actually need some more diversified transformation methods to improve our platform flow of this transformation limit. Thank you for the question. So I have to say that even if you can see that now in the businessman module carrying Weibo, we do have actually a VAS, but if you're talking about the first of all, the positioning and also the market influence,

of Weibo as a big social media platform, and also because of the importance and also the product of advertisement itself as a kind of a necessity or necessary product for the customers to actually launch their new products, we can see that the efficiency of the monetization by using the advertisement is actually the highest. And also, of course, that still, if you're talking about a fluctuated market, still, we do see a lot of pressure on the pricing of this particular advertisement. And also, that is the reason why we have to diversify the monetization method. And even if, you know, currently speaking, we have our VAS accounting for the total revenue which is about only 13%, not very high. But actually, I think that is significantly important for us to maintain the fundamental line for our monetization itself, and especially based on the traffic.

In terms of e-commerce and small businesses, we mainly use the platform-based advertising model. We have a very good partnership with Taobao, and we all know about it. Indeed, this year we have chosen some of the high-up areas to develop the transformation of closed-end e-commerce, because we will see that the efficiency of cash flow, including in the service of users, will be higher. For example, some online and offline combined social e-commerce areas. In this way, we can put the advantages of Weibo platform, including our Lantv service providers and offline institutions, can be integrated together to provide users with a high-quality content delivery,

So second thing in terms of our e-commerce and also the mini shop of Weibo. So actually we are having a model of combining the platform with the product. And also, as you all know that we always keep a very good relationship with JD and also TAOBO and also the other alliances as well. So in terms of this one, we are always keeping a very good collaboration with those very good e-commerce with a very high ARPU. And also, this is very efficient for us to generate enough cash flow, and especially for those scenarios of online plus offline as well. And also, we can see that this is especially important for us to leverage the capability and also the advantage of Weibo as a platform and especially helping those offline organizations to actually have a very good select of the versions and also helping to improve the quality of the users by guaranteeing a very good model of placing order within this particular station. and also having to guarantee a very good agreement fulfillment and also the performance. We've been having a very good growth on this particular segment. Okay.

In terms of this year's situation, because of the influence of some ecological governance in the entertainment industry last year, the membership industry has actually declined a bit in the first half of the year. However, from the third quarter, we have upgraded some membership rights and have also gradually increased the size and income of our members through upgrade services. In terms of Weijia members, they have maintained the same growth trend this year, especially in health care, including the Internet and finance. Overall, we have a good growth space under the Weijia member model. The membership business is actually the main part of the income and profit of our non-advertising business. We will continue to invest in this part. In fact, on the one hand, we are talking about some functional members of Weibo, including SBIP. On the other hand, it is a member of Weijia for content creators. In this part, we hope that it can be better in the future. On the one hand, it is beneficial to us to increase our income and profit. At the same time, it also helps our content creators to perform better transformation. Thank you.

And also, third of all, talking about the members, as you can see that during the past development, we have been actually having a very stable and also mature membership system. So on one hand, this is actually very good to guarantee a benefit that is specifically unique to those loyal members of our Weibo platform. And also, this is very good for us to actually brain a lot of monetization capabilities and opportunities for those content creators as well. So this is actually, you know, even going to further boost the activity and also enhance the ability of the monetization. And also, you know, previously in the last year, we had, you know, a lot of restrictions from the entertainment industry. And also, that was a little bit impactful to our total businesses. But actually, you can see that while we are upgrading the benefits that we are providing to the users and also the members in specific in Q3, we are seeing that the revenues and also the loyalty of the members actually improve in Q3. And also, if you are sharing some of the colors on the V-plus membership system, so we are having a kind of a year-over-year growth on this area, and especially in the area of healthcare, internet, and also the other segments. We're keeping a very good growth year over year. And also, this is giving us more space, of course, in the future to further enhance this particular segment of the vPlus membership system. And also, membership system is a very important revenue, which we regard as a non-advertising revenue to Weibo. And this is really significant. So in the future, we're going to further enhance more functions, and also dedicating ourselves into, for example, first of all, SVIP, and also second is the V Plus system, which is targeting in specifics those content creators. So this is a very good way for us to really improve the monetization and also the revenue of the content creators, and also this is going to be very beneficial to Weibo in the long run as well. Thank you.

With that, ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.