SINA Corp Beats Earnings Estimates in Q2, Revenues In Line

SINA Corp. (SINA) reported second-quarter 2014 earnings of 7 cents per share, which were much-better than the Zacks Consensus Estimate of a break-even. Earnings were also much better than a loss of 26 cents per share reported in the year-ago quarter.

Quarter Details

Revenues (adjusting for deferred revenues ($4.1 million) mostly related to the license agreements resulting from the E-House/CRIC transaction) increased 20.7% year over year to $187 million and were slightly higher than management’s guided range of $177 million to $182 million. Revenues were in line with the Zacks Consensus Estimate.

Advertising revenues moved up 29.2% from the year-ago quarter to $155.8 million. Advertising revenues were slightly above the higher end of management’s guided range of $152–$155 million. The year-over-year growth was driven by Weibo advertising growth fueled by the FIFA World Cup in Brazil.

Non-advertising revenues decreased 11.3% year over year to $28.6 million in the quarter, but surpassed management’s guided range of $25–$27 million. The decline was mainly due to lower mobile value added services (MVAS) revenues, partially offset by the $10.0 million increase in Weibo value added services (VAS) revenues.

Weibo revenues jumped 105.4% year over year to $77.3 million. The monthly active user for month of June grew 30% on a year-over-year basis. The strong growth momentum of Weibo advertising was driven by native ads, particularly for small and medium sized enterprises, as well as Alibaba and ecommerce merchant revenues.

Portal revenues climbed 6.2% year over year to $96.3 million. The growth was driven by an improved Internet services sector.

Gross margin increased to 60.1% from 52.1% in the year-ago quarter. This increase was mainly attributable to a higher revenue base and a significant jump in advertising and non-advertising gross margin. A favorable product mix of higher margin Weibo advertising and value-added-services backed the increased.

Operating expenses as percentage of revenues flared up 20 basis points (bps) to 67.3%. The sharp rise was mainly due to 41.9% higher selling & marketing expenses and 15.6% higher product development costs, partially offset by 8.3% lower general & administrative expense.

However, the steep rise in operating expenses negatively impacted profitability. The company reported operating loss (including stock-based compensation) of $12.8 million, narrower than a loss of $22.9 million in the year-ago quarter.

SINA reported net income was $4.6 million or 7 cents compared with a loss of $17.4 million or 266 cents per share.

SINA exited the second quarter with cash, cash equivalents and short-term investments of $2.30 billion compared with $1.81 billion at the end of the first quarter. Cash provided by operating activities in the second quarter was $9 million.

Outlook

SINA expects revenues for the third quarter of 2014 in the range of $193 million to $199 million. Management believes that increasing investment by Weibo on product development and marketing will hurt its as well as SINA’s operating results in 2014. SINA expects to invest further in its own portal (mobile and video) that will also keep margins under pressure.

Our Take

We believe that SINA remains a premier company based on its strong product pipeline, continuous investments in product development and marketing and a robust user base for its e-Commerce and Weibo offerings.

However, the recent licensing issue with the Chinese government is a major headwind, which will negatively impact brand revenues in the near term. Although the investments in mobile and video are long-term positives, these will hurt profitability for the rest of 2014.

Moreover, Weibo is expected to face stiff competition from the likes of WeChat in China, which will hurt its user base. We believe that Weibo’s monetization ability will be a major driving factor for SINA amid increasing competition from the likes of Sohu.com Inc. (SOHU), NetEase (NTES) and Youku Tudou (YOKU) in the video and brand advertising market.

Currently, SINA has a Zacks Rank #3 (Hold).