SINA Corp. (SINA) reported first quarter 2011 earnings of 21 cents per share, which missed the Zacks Consensus Estimate by 2 cents. Earnings exclude one-time items but include stock-based compensation charges.
Earnings per share decreased 25.0% year over year, due to increased marketing and engineering expenses related to Weibo and video initiatives.
Operating Performance
Net income on a non-GAAP basis was $13.9 million compared with $18.2 million in the year-ago quarter.
Gross profit on a non-GAAP basis increased 12.0% year over year to $48.7 million in the quarter. Gross margin was 51.0% in the quarter compared with 54.1% in the prior-year quarter.
Advertising gross margin was 54.0% versus 56.0% reported in the prior-year quarter. Non-advertising gross margin decreased 100 basis points (bps) to 55.0% in the first quarter due to higher spending on bandwidth and content, mostly related to microblog Weibo and video initiatives.
Mobile-value-added-services (MVAS) gross margin declined to 39.0% from 49.0% reported in the year-ago quarter, primarily due to product mix and increased revenue share of MVAS partners.
Operating income, excluding one-time items and charges, was $7.1 million in the quarter compared with $12.5 million in the prior-year quarter. Operating margin declined 820 bps to 7.4% in the reported quarter.
This decline was primarily driven by higher operating expenses, which increased 34.4% year over year.
Revenue
Revenue, excluding deferred revenue, increased 19.0% year over year to $95.5 million in the reported quarter, in line with management’s guided range of $93.0 million to $96.0 million.
Advertising revenue on a non-GAAP basis was $72.3 million, up 33.3% year over year in the quarter, in line with the high end of management’s guidance range of $71.0 million to $73.0 million.
However, non-advertising revenue was $23.2 million in the quarter, down 11.0% year over year. However, non-advertising revenue inched past the company’s estimated range. MVAS revenue was $21.3 million, down from $24.6 million in the year-ago quarter.
SINA’s social media platform Weibo witnessed tremendous growth, with total registered users of more than 140 million at the end of March, 2011.
Balance Sheet & Cash Flow
SINA exited the first quarter with cash, cash equivalents and short-term investments of $830.5 million compared with $882.8 million at the end of the fourth quarter. The decrease in cash balance was mainly due to the acquisition of approximately a 19% interest in Mecox Lane Limited.
In March 2011, SINA purchased 77.0 million ordinary shares (equivalent to 11.0 million American Depositary Shares or ADSs), or approximately 19% of Mecox Lane's issued and outstanding shares of Mecox Lane Limited for an aggregate purchase price of $66.0 million or $0.8571 per share, equivalent to $6.00 per ADS.
Cash flow from operating activities was $21.9 million compared with $34.2 million in the prior quarter and $34.3 million in the year-ago quarter.
Guidance
SINA expects non-GAAP net revenue for the second quarter of 2011 of between $112.0 million and $115.0 million.
Non-GAAP advertising revenue is expected to be in the range of $90 million and $92 million, while non-GAAP non-advertising revenue is expected in the range of $22 million to $23 million.
Recommendation
SINA remains a premier company due to its strong product pipeline, continuous investment in product development and marketing and a robust user base for its E-Commerce and Weibo offerings.
SINA’s online advertising business has a competitive edge based on its popularity in China, superior brand recognition and persistent marketing innovations.
However, weak non-advertising revenue growth is expected to hamper top-line growth going forward. Moreover, increasing competition from Baidu Inc. (BIDU) and Sohu.Com Inc. (SOHU) will hurt profitability over the long term.
We maintain our Neutral recommendation over the long term. Currently, SINA has a Zacks #5 Rank, which implies a Strong Sell rating over the short term.
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