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What Drove Weibo’s Gross Margin in Q2 2018?

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What led to the gross margin growth of Weibo?

Weibo’s (WB) cost of revenue rose 23% YoY to $61.8 million in the second quarter of 2018. The cost of revenue decreased by 2% quarter-over-quarter. The cost as a percentage of revenue decreased in 2018. Cost of revenue consumed 20% of the revenue in the second quarter of 2017 compared to 18% and 14% in the first and second quarters of 2018, respectively.

Weibo’s gross profit increased by 80% YoY to $364.8 million in the second quarter of 2018. The gross profit rose 27% quarter-over-quarter. Higher revenue growth relative to the cost of revenue growth led to the growth in gross profit. The gross margin improved from 80% in the second quarter of 2017 to 82% and 86% in the first and second quarters of 2018, respectively. Lower cost of revenue as a proportion of revenue drove the improvement in the margin.

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Peers’ cost and gross margin

Weibo’s peers, with the exception of Baidu (BIDU), saw an increase in their cost of revenue margin for the quarter ended June 30, 2018. The increase led to a decline in their gross margin except for Baidu’s. Tencent’s (TCEHY) cost of revenue margin rose from 50% in the second quarter of 2017 to 53% in the second quarter of 2018. As a result, the gross margin declined from 50% to 47% for the respective quarters. Alibaba’s (BABA) cost of revenue margin increased from 35% in the quarter ended June 30, 2017, to 54% in the quarter ended June 30, 2018. As a result, gross margin declined from 65% to 46% for the respective quarters. Baidu’s cost of revenue margin fell from 51% in the second quarter of 2017 to 46% in the second quarter of 2018.

Thus, gross margin rose from 49% to 54% for the respective quarters. NetEase’s (NTES) cost of revenue margin rose from 50% in the second quarter of 2017 to 56% in the second quarter of 2018. Thus, gross margin fell from 50% to 44% for the respective quarters. Facebook’s (FB) cost of revenue margin rose from 13% in the second quarter of 2017 to 17% in the second quarter of 2018. Thus, gross margin fell from 87% to 83% for the respective quarters.

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