SINA Corp. (SINA) reported third quarter 2011 earnings of 19 cents per share, which were ahead of the Zacks Consensus Estimate by 3 cents. However, earnings per share decreased a whopping 58.7% year over year primarily due to margin contraction. Reported earnings exclude one-time items but include stock-based compensation charges.
Operating Performance
Gross profit on a non-GAAP basis increased 14.4% year over year to $68.4 million in the quarter. Gross margin declined to 54.5% in the quarter from 57.8% in the prior-year quarter.
Advertising gross margin declined 330 basis points (bps) to 59.3% from 62.6% in the prior-year quarter. The year-over-year decline was primarily due to increased spending on bandwidth and content and higher personnel related costs. Non-advertising gross margin plunged 550 bps to 45.1% from 50.6% in the reported quarter.
Mobile-value-added-services (MVAS) gross margin declined to 31.8% from 38.3% reported in the year-ago quarter, primarily due to favorable product mix and increased revenue share of MVAS partners.
Operating income, excluding one-time items and charges, came in at $4.5 million in the quarter compared with $24.1 million in the prior-year quarter. The year-over-year decline was primarily driven by higher operating expenses, which increased 79.0% year over year, due to higher marketing expenditure, personnel-related expenses and infrastructure costs related to Weibo.com.
Net income on a non-GAAP basis was $13.0 million versus $30.4 million in the year-ago quarter.
Revenue
Total revenue (excluding deferred revenue) increased 21.3% year over year to $125.6 million in the reported quarter, in line with the high-end of management’s guided range. However, total revenue missed the Zacks Consensus Estimate of $130.0 million.
The year-over-year growth in total revenue was primarily driven by higher advertising revenue in the quarter, up 24.7% to $101.0 million on a non-GAAP basis and was in line with the mid-point of management’s guidance range of $100.0 million to $102.0 million.
Non-advertising revenue was $24.6 million in the quarter, up 9.0% year over year. This was slightly above the company’s guided range of $23 million to $24 million. MVAS revenue was $21.4 million, slightly up from $20.7 million in the year-ago quarter.
In September 2011, SINA launched the updated version of its social media platform Weibo. SINA believes that till date over half of its existing users (more than 200 million) has upgraded to the latest version.
Balance Sheet & Cash Flow
SINA exited the third quarter with cash, cash equivalents and short-term investments of $742.1 million compared with $826.4 million at the end of the second quarter. Cash flow from operating activities was $14.3 million compared with $11.4 million in the prior quarter.
Guidance
SINA expects non-GAAP net revenue to be between $128.0 million and $131.0 million for the fourth quarter of 2011. Non-GAAP advertising revenue is expected in the range of $103.0 million to $105.0 million, while non-GAAP non-advertising revenue is projected in the range of $25.0 million to $26.0 million.
Recommendation
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 67.6% in the nine months of 2011 compared to revenue growth of 20.4%. 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), and increasing regulation from Chinese governmentwill 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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