WEIBO Corp annual report, Q4 FY2015

Weibo Corporation: FY2015 Form 20-F Summary

Business context and reporting period

This filing is an annual report on Form 20-F for the fiscal year ended December 31, 2015, rather than a standalone fourth-quarter filing. Weibo is a Cayman Islands holding company operating primarily in China through subsidiaries and a contractual variable interest entity, Beijing Weimeng Technology Co., Ltd. The company provides a Chinese-language social media platform and monetizes user traffic mainly through advertising and marketing services, with additional revenue from games, VIP memberships and data licensing. Financial statements are prepared under U.S. GAAP.

December 2015 monthly active users: 236 million, versus 175.7 million in December 2014.
December 2015 average daily active users: 106 million, versus 80.6 million in December 2014.
Approximately 83% of December 2015 MAUs accessed Weibo through mobile devices.
As of December 31, 2015, 212.2 million ordinary shares were outstanding. Each ADS represents one Class A ordinary share.

Financial performance and key metrics

Metric	FY2015	FY2014	Change
Total revenue	$477.9 million	$334.2 million	+43%
Advertising and marketing revenue	$402.4 million	$264.8 million	+52%
Other revenue	$75.5 million	$69.4 million	+9%
Operating income	$37.5 million	$(22.1) million	Improved
Net income attributable to Weibo	$34.7 million	$(65.3) million	Turned profitable
Diluted EPS/ADS	$0.16	$(0.35)	Improved
Net cash from operating activities	$182.0 million	$(19.4) million	Improved

Advertising and marketing represented approximately 84% of total revenue. Mobile advertising represented approximately 63% of advertising revenue, up from 44% in 2014.
Alibaba generated $143.7 million of advertising and marketing revenue, or approximately 30% of total revenue. Key-account revenue was $103.5 million, while SME revenue increased to $155.2 million from $61.5 million.
Other revenue included $44.3 million from game-related services, $17.6 million from VIP memberships and a data-licensing business that declined 60% year over year.
Total costs and expenses increased 24% to $440.4 million. Cost of revenues rose 70% to $142.0 million, product development increased 14% to $143.4 million, sales and marketing increased 5% to $126.1 million, and general and administrative expense increased 9% to $28.9 million.
Approximate operating margin was 7.8%, compared with negative 6.6% in 2014. Approximate net margin attributable to Weibo was 7.3%, compared with negative 19.5% in 2014.
Stock-based compensation increased to $26.4 million from $13.8 million.
Investment-related impairment increased to $8.0 million from $2.5 million, including $6.6 million related to long-term investments.

Cash flow, liquidity, debt and balance sheet

Cash and cash equivalents were $237.4 million at December 31, 2015, compared with $284.9 million at year-end 2014.
Short-term investments were $98.4 million, producing total cash, cash equivalents and short-term investments of $335.9 million, down from $451.3 million.
Cash used in investing activities was $228.3 million, primarily reflecting $268.8 million of investments and prepayments in long-term investments, $149.4 million of short-term investment purchases and the $22.0 million acquisition of the Weibo Funds.
Capital expenditures were $10.9 million, compared with $14.7 million in 2014.
Total liabilities were $211.2 million, including $12.2 million payable to SINA. The filing reports no material interest-bearing debt at year-end; the remaining SINA balance was interest-free and payable on demand.
Total shareholders’ equity increased to $628.0 million from $567.4 million. Accumulated deficit declined to $307.7 million from $342.4 million.
Management stated that existing cash, cash equivalents and short-term investments were sufficient to fund operations, capital expenditures and other obligations for at least the next twelve months.
Contractual obligations totaled $80.2 million, comprising $8.6 million of operating leases and $71.6 million of purchase obligations, mostly due within one year.

Material changes versus the prior comparable period

Revenue growth accelerated through advertising, mobile monetization and SME demand, while user growth supported higher engagement and advertising inventory.
The company moved from a $65.3 million attributable net loss in 2014 to $34.7 million of attributable net income in 2015. Management stated that quarterly net profitability began in the second quarter of 2015.
Operating cash flow improved materially from a $19.4 million outflow to a $182.0 million inflow, partly due to higher accrued liabilities, deferred revenue, stock-based compensation and collections.
Cash and liquid investments declined because the company deployed $268.8 million into equity investments and paid $22.0 million for the Weibo Funds.
The company acquired SINA’s majority interests in two Weibo Funds for $22.0 million. The transaction was accounted for as a common-control reorganization, and prior periods were retrospectively adjusted.
Alibaba’s strategic collaboration and marketing cooperation agreements expired in January 2016. Although ordinary-course cooperation was expected to continue, management expected Alibaba revenue in 2016 to be significantly lower than in 2015.
Alibaba accounted for approximately 30% of 2015 revenue, creating material customer concentration despite strong growth in third-party and SME revenue.

Outlook, management commentary, risks and unusual items

Management’s priorities were continued user and engagement growth, especially on mobile; improved targeting through the social interest graph; expanded mobile advertising formats; product innovation; and broader monetization of platform traffic.
Management expected absolute cost of revenues, sales and marketing, product development and general and administrative expenses to increase as the platform expands.
Revenue growth may be affected by the loss of strategic-collaboration revenue from Alibaba, competition for users and advertising budgets, slowing smartphone shipments in China, seasonality and macroeconomic conditions.
The company’s operating model depends on a PRC VIE structure because of foreign-investment restrictions on internet content services. Changes in PRC laws or inability to enforce the contractual arrangements could impair control of the VIE and the ability to consolidate its results.
Internet content, data privacy, cybersecurity, user-identity verification, advertising, online games and other activities are heavily regulated in China. The company had not verified the identities of all users required to be verified and had not obtained an internet news publication license; it was also applying for an internet publishing permit.
As of December 31, 2015, approximately $334.6 million of cash, bank deposits and short-term investments were held with large domestic banks in China, exposing the company to banking-system and deposit-recovery risk.
Long-term investments totaled $294.7 million, including approximately $281.7 million in cost-method investments, many in privately held or early-stage companies. Valuation and impairment judgments are therefore significant.
The company is controlled by SINA, which held 54.5% of ordinary shares and 78.3% of voting power as of March 31, 2016. SINA’s control, the dual-class structure and related-party agreements may limit minority shareholder influence.
The company does not expect to pay cash dividends in the foreseeable future and intends to retain earnings for operations and expansion.
No material legal proceedings were reported as of December 31, 2015. Management concluded that disclosure controls and internal control over financial reporting were effective; no auditor attestation report was required because Weibo was an emerging growth company.

Important facts an investor should verify

Whether post-January 2016 Alibaba revenue declined as expected and how effectively third-party, SME and mobile advertising replaced it.
Current MAU and DAU growth, engagement trends and the percentage of traffic and revenue generated from mobile users.
The sustainability of profitability after excluding or adjusting for stock-based compensation, investment impairments and other unusual items.
The composition, valuation and subsequent performance of the $294.7 million long-term investment portfolio.
Cash availability at the Cayman parent and Hong Kong subsidiary versus cash held in PRC entities, including restrictions on cross-border transfers and dividends.
Any changes to PRC regulation affecting the VIE structure, internet-content licenses, user verification, cybersecurity, privacy, advertising and online games.
Customer and receivable concentration: Alibaba represented 45% of net accounts receivable at year-end 2015, and one other customer represented 16%.
The effect of SINA’s voting control, related-party service arrangements and non-competition restrictions on corporate governance and strategic flexibility.