SINA Corp. (SINA) reported second quarter 2011 earnings of 14 cents per share, which missed the Zacks Consensus Estimate by 4 cents. Reported earnings exclude one-time items but include stock-based compensation charges.
Earnings per share decreased a whopping 62.1% year over year due to increased marketing and engineering expenses related to Weibo. Despite the year-over-year miss, SINA’s shares surged $5.37 (5.78%) in after hours trading, reflecting the fact that the results were already priced into the stock.
Operating Performance
Gross profit on a non-GAAP basis increased 19.3% year over year to $63.7 million in the quarter. Gross margin was 55.7% in the quarter compared with 56.3% in the prior-year quarter.
Advertising gross margin was 59.0% versus 60.0% in the prior-year quarter. Non-advertising gross margin decreased 70 basis points (bps) to 42.4% in the reported quarter.
Mobile-value-added-services (MVAS) gross margin declined to 39.0% from 42.0% 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, came in at $4.2 million in the quarter compared with $21.6 million in the prior-year quarter. The year-over-year decline was primarily driven by higher operating expenses, which increased 87.3% year over year.
Net income on a non-GAAP basis was $9.5 million versus $24.3 million in the year-ago quarter.
Revenue
Total revenue, excluding deferred revenue, increased 20.6% year over year to $114.3 million in the reported quarter, in line with management’s guided range of $112.0 million to $115.0 million. However, total revenue missed the Zacks Consensus Estimate of $120.0 million.
The year-over-year growth in total revenue was primarily driven by higher advertising revenue in the quarter (up 25.6% to $91.8 million on a non-GAAP basis), which was in line with the high end of management’s guidance range of $90.0 million to $92.0 million.
Non-advertising revenue was $22.5 million in the quarter, up 4.0% year over year. This was in line with the midpoint of the company’s estimated range of $22 million to $23 million. MVAS revenue was $19.5 million, slightly down from $20.0 million in the year-ago quarter.
SINA’s social media platform Weibo witnessed tremendous growth, with total registered users of more than 200 million at the end of June, 2011.
Balance Sheet & Cash Flow
SINA exited the second quarter with cash, cash equivalents and short-term investments of $826.4 million compared with $830.5 million at the end of the first quarter. Cash flow from operating activities was $11.4 million compared with $21.9 million in the prior quarter.
Guidance
SINA expects non-GAAP net revenue of between $123.0 million and $126.0 million for the third quarter of 2011. This reflects a growth of 19.0% to 22.0% from $103.6 million reported in the third quarter of 2010.
Non-GAAP advertising revenue is expected in the range of $100.0 million to $102.0 million, while non-GAAP non-advertising revenue is projected in the range of $23.0 million to $24.0 million.
Our Take
We believe 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.
Although management expects to spend more on Weibo ($100.0 million in fiscal 2011) to add features such as virtual currency and games, we believe increasing advertising revenue from the monetization of Weibo will drive top-line growth going forward.
However, we also note that operating expenses increased approximately 61.0% in the first half of 2011 compared to revenue growth of 20.0%. Hence, any weakness in advertising revenue, primarily due to the sluggish macro environment, will impact SINA’s ability to counter increasing operating expenses, which in turn will hurt the bottom line going forward. Moreover, increasing competition from Tencent Holdings 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 #3 Rank, which implies a Hold rating over the short term.
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