WEIBO Corp annual report, Q4 FY2019

Weibo Corporation 2019 Form 20-F Summary

Business context and reporting period

Weibo Corporation, a Cayman Islands holding company controlled by SINA, operates a China-focused social media platform through wholly owned subsidiaries and contractual variable-interest entities. The filing is an annual report for the fiscal year ended December 31, 2019, rather than a standalone 2019 fourth-quarter filing. Financial statements are prepared under U.S. GAAP and audited by PricewaterhouseCoopers Zhong Tian LLP, which issued an unqualified opinion and reported effective internal control over financial reporting.

Weibo reported 516 million monthly active users and 222 million average daily active users in December 2019, up from 462 million and 200 million, respectively, in December 2018. Approximately 94% of December 2019 MAUs accessed Weibo through mobile devices.

Financial performance and key metrics

Metric	2018	2019	Change
Total revenue	$1,718.5 million	$1,766.9 million	+3%
Advertising and marketing revenue	$1,499.2 million	$1,530.2 million	+2%
Value-added services revenue	$219.3 million	$236.7 million	+8%
Income from operations	$609.3 million	$597.6 million	-2%
Net income	$572.6 million	$492.8 million	-14%
Net income attributable to Weibo	$571.8 million	$494.7 million	-14%
Diluted earnings per ADS	$2.52	$2.18	-13%
Net cash from operating activities	$488.0 million	$631.7 million	+29%

Advertising and marketing represented approximately 87% of 2019 revenue. Mobile advertising represented approximately 87% of advertising and marketing revenue, compared with 83% in 2018.
Key-account advertising revenue increased 8% to $729.3 million, while SME revenue declined 1% to $703.2 million. Advertisers declined from 2.9 million to 2.4 million, but average spending per advertiser excluding Alibaba increased 26% to $593.
Alibaba revenue declined 17% to $97.8 million, while SINA and other related-party advertising revenue increased to $230.0 million.
Value-added services benefited from VIP membership revenue growth of 10% to $108.1 million and Yizhibo live-streaming revenue growth to $76.7 million. Game-related revenue fell 84% to $4.4 million.
Approximate operating margin was 33.8% in 2019 versus 35.5% in 2018. Net margin attributable to Weibo was approximately 28.0% versus 33.3%.
Cost of revenue increased 18% to $328.8 million, primarily due to live-streaming revenue sharing, labor, bandwidth and advertising production costs. Sales and marketing expense declined 12% to $465.3 million, while product development expense increased 14% to $284.4 million and general and administrative expense increased 107% to $90.7 million.
Stock-based compensation increased to $61.3 million from $41.0 million in 2018.

Cash flow, liquidity and debt

Cash and cash equivalents increased to $1.453 billion from $1.235 billion. Short-term investments increased to $951.2 million from $591.3 million, producing total cash, cash equivalents and short-term investments of $2.404 billion.
Operating cash flow was $631.7 million. Investing cash flow was negative $1.201 billion, primarily reflecting purchases of short-term investments, $688.9 million of cash paid for long-term investments and $190.3 million of net loans to SINA. Financing cash flow was positive $791.9 million, principally from the 2024 senior notes issuance.
At year-end, carrying amounts included $888.3 million of convertible debt and $794.0 million of unsecured senior notes. The 2022 convertible notes have a $900 million principal amount, 1.25% coupon and November 2022 maturity. The 2024 senior notes have an $800 million principal amount, 3.50% coupon and July 2024 maturity.
Total contractual obligations were $2.444 billion, including $559.975 million of purchase commitments, $933.750 million of obligations related to the 2022 Notes and $940.0 million related to the 2024 Notes.
Management stated that available liquidity was sufficient to fund operating activities, capital expenditures and other obligations for at least the next twelve months. However, $952.0 million of total cash, cash equivalents and short-term investments was held by consolidated China entities, including $99.5 million held by VIEs and their subsidiaries, and PRC currency-transfer restrictions may limit use of offshore cash.
Capital expenditures were $21.7 million in 2019. No dividend was declared or paid, and management does not expect dividends in the foreseeable future.

Material changes versus the prior comparable period

Revenue growth slowed materially to 3% from 49% in 2018, while operating income declined 2% and net income attributable to Weibo declined 14%.
Profitability was affected by higher cost of revenue, product development spending, general and administrative expense, bad-debt provisions and investment-related impairment.
Investment-related impairment rose to $249.9 million from $24.1 million, including a $214.7 million partial impairment of Yixia Tech. This was partly offset by $207.4 million of net fair-value gains, including a $176.2 million unrealized gain related to Showworld after its listing.
Accounts receivable from third parties increased, and the allowance for doubtful accounts rose to $36.6 million from $12.4 million because of slower collections and adverse macroeconomic conditions.
Weibo issued the $800 million 2024 senior notes in July 2019, increasing leverage and interest expense.
The company adopted the new lease standard on January 1, 2019, recognizing right-of-use assets and lease liabilities.
Weibo launched the Oasis interest-based social product in the fourth quarter of 2019.

Guidance, outlook, commentary and risks

Management expected total revenue to decline year over year during the first half of 2020 because of the COVID-19 pandemic. The filing states that the full-year 2020 impact could not be reasonably estimated.
COVID-19 had already reduced customer advertising budgets, slowed accounts-receivable collections and required additional doubtful-account allowances. Management also identified possible downward adjustments or impairment of long-term investments.
In March 2020, Weibo experienced a data leak caused by malicious API queries. The PRC Ministry of Industry and Information Technology instructed Weibo to improve data security, privacy policies and internal information-security management.
The business depends heavily on advertising, user engagement, mobile monetization, content creators and platform partners. Competition from major Chinese internet, short-video, messaging, gaming and e-commerce platforms remains intense.
Weibo relies on a PRC VIE structure because of foreign-ownership restrictions on internet businesses. Changes in PRC law or adverse interpretation of the contractual arrangements could result in fines, restructuring, operating restrictions, loss of licenses or inability to consolidate the VIEs.
Content censorship, user real-name verification, privacy and cybersecurity requirements, online-game and live-streaming licensing, and evolving PRC regulation may increase costs or restrict operations. Weimeng was still applying for an internet publishing permit and lacked an internet audio/video program transmission license identified as relevant to the live-streaming business.
SINA controlled approximately 71% of voting power as of March 31, 2020 and remains a major customer, service provider and counterparty. Weibo had $236.6 million of loans to and interest receivable from SINA at December 31, 2019.
Alibaba accounted for approximately 6% of 2019 revenue and 14% of year-end net accounts receivable. A loss or reduction of the Alibaba relationship could adversely affect advertising revenue.
Long-term investments totaled $1.027 billion, including $558.6 million of investments without readily determinable fair values. Valuations and impairment conclusions involve significant judgment and may create substantial earnings volatility.
Legal proceedings include copyright, trademark, defamation, unfair-competition and labor matters. The filing states that reasonably possible losses were generally immaterial or could not be estimated and that existing proceedings were not expected to have a material adverse effect.

Most important facts for an investor to verify

Whether 2020 advertising demand, collections, bad-debt expense and investment valuations deteriorated further following the COVID-19 disclosure.
The sustainability of revenue growth and margins given the decline in advertisers, weaker SME demand, lower Alibaba revenue and rising product-development and platform-content costs.
The carrying values and subsequent performance of Yixia Tech, Showworld and other private investments, including the risk of additional impairment or reversal of fair-value gains.
The terms, covenants, conversion exposure and refinancing requirements for the 2022 convertible notes and 2024 senior notes.
Whether PRC regulators took additional action regarding the March 2020 data leak, content regulation, licensing, real-name verification or the VIE structure.
The ability to transfer cash from PRC subsidiaries and VIEs to the offshore holding company, considering restricted net assets of approximately $394.7 million and foreign-exchange controls.
Related-party balances and transactions with SINA, Alibaba and investees, including the material increase in loans and receivables from related parties.
The effect of SINA’s voting control, dual-class share structure and lack of expected dividends on minority ADS-holder rights and returns.