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Highlights From SINA's Q3 Conference Call: Sees Continued Growth in China, But Guides Slightly Below for Q4 Revenues

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November 17, 2009 10:44 AM EST

SINA Corporation (NASDAQ: SINA) reports Q3 EPS of $0.34, ex-items, 3 cents better than the analyst estimate of $0.31. Revenue for the quarter was $96.4 million, which compares to the estimate of $94.39 million. Shares are up over 9% today.

Highlights From SINA's Q3 Conference Call:

Sees Q4 advertising sales of $61-$63 million and non-advertising sales of $32-$33 million.
(CEO) The brand advertising revenues increased 10% sequentially and amounted to 63.8 million, beating the high end of our guidance at 62 million.
The better than expected performance for our brand advertising business is a result of continuing recovery of China advertising market with more signs of rebound in Chinese economy.
We are particularly encouraged by the signs of accelerated recovery in advertising market beginning in the month of September.
Our mobile business has also had modest out performance in the third quarter as we maintain our stronghold in this sector.
The major sectors experienced year-to-year growth in the third quarter real estate and fast moving consumer products or FMCG.
Both sectors grew approximately 10% from the same period of last year. The growth in FMCG is particularly encouraging given the outstanding performance we had in Q3 of last year for this sector.
For Q3, China's GDP grew by 8.9% year-over-year, a strong sign that Chinese economy recovery is well underway.
We currently expect that our advertising business will experience higher than normal sequential growth in Q4 compared to the previous years, prior to the Olympic year.
More importantly, for the first time this year, we are going to see meaningful growth in our advertising business on a year-over-year basis in Q4.
If Chinese economy continues its current pace for recovery, we expect Chinese online advertising market would resume its strong growth next year and SINA will benefit significantly.
During Q3, we launched a high definition online video platform which allows viewers to watch DVD quality movies and TV dramas online.
Also in the month of September, we started the beta testing of SINA miniblog, a Tweeter type of product in China. Although this product is still in the soft launch stage, it has already created big buzz, with a lot of press coverage.
At the end of September, we announced that our merger with Focus Media's out-of-home advertising business was cancelled, with expiration of the process of antitrust approval by the Chinese Commerce Department has taken much longer than we expected. While we still believe that the proposed merger will result in a lot of synergies between the two companies and that help create a dominant new media company in China, the prolonged process had created negative impact on the business of both companies. As such, we mutually decided not to further extend our coding deadline, instead, we will seek a strategic corporations between the two companies at the operation levels in the future.
On July 23, 2009, we announced that we had entered into a definitive agreement to merge our online real estate business with E-House's wholly owned subsidiary, CRIC Holdings Limited. E-House is China's largest real estate agency and a consulting service company with a presence in more than 30 cities. Its subsidiary CRIC operates the largest real estate database, and it provides real estate consulting and data service in China.
Under the agreement, SINA would inject its online real estate business into its majority owned subsidiary China Online Housing, CRIC would issue its ordinary shares to SINA in exchange for SINA's equity interest in China Online Housing, giving SINA a 39% interest in CRIC. The transaction will close on October 16, with CRIC's successful listing on NASDAQ. SINA's equity interest will be approximately 33% in CRIC after its IPO.
As a result, starting from Q4 of 2009 SINA will be required to deconsolidate the financial results of its real estate business and account for its investment in CRIC using the equity method of accounting.
On September 28, 2009 the company announced that it had entered into a definitive agreement for our private equity placement for its ordinary shares with New-Wave Investment Holding Company Limited, a BVI company established and controlled by myself with investors from other members of management team and a certain private equity funds.
At the closing, SINA will receive gross proceeds of US$180 million and New Wave will receive approximately 5.6 million ordinary shares in SINA. The transaction is expected to close shortly.
(CFO) Total revenues for Q3 of 2009 came in at 96.4 million, which exceeds our guidance and represents a sequential increase of 7%.
Our total online advertising revenues, which exclude search revenues for Q3 of 2009 totaled 63.8 million, increasing 10% from last quarter on top of a 34% sequential increase from Q1.
Q3 2009, advertising revenues exceeded the high end of our previous guidance by 1.8 million, as we saw the momentum in the recovery of China's online advertising business continuing, especially in the last month of the quarter ahead of the constitutional holidays.
On a year-over-year basis, third quarter 2009 advertising revenues declined 16%, when compared to a very successful Olympic quarter in 2008.
We saw strong sequential growth particularly coming from fast moving consumer goods and financial sectors, which grew over 40% quarter-over-quarter.
Telecommunications was another bright spot with 20% increase quarter-over-quarter and has displaced IT as a top five customer segment.
Compared to the 16% year-over-year drop for the total advertising business sectors that were less impacted by the Olympics such as automobile, real estate and education performed relatively well, down 4% to up 10% year-over-year.
Compared to a year ago the number of advertisers in China grew 21%, which we believe is a reflection of the improving sentiment in the business environment and increasing adoption of online advertising.
Average spending per customer in China was down 31% year-over-year, partly due to comparison against an Olympic quarter.
Turning to our non-advertising business; for the third quarter of 2009, our mobile value-added services business or MVAS generated 30.9 million in total revenues, an increase of 14% year-over-year and flat quarter-over-quarter.
Revenues from 2G products were 22.1 million, up 3% from last quarter, mostly driven by the slight sequential growth of SMS and IVR, our top two mobile product lines, which together make up 68% of our total mobile revenues.
Revenues from 2.5G products were 8.8 million, down 7% from the last quarter.
Turning to gross margin; our non-GAAP gross margin, which excludes stock-based compensation and intangible asset amortization for Q3 2009, was 60%, compared to 58% last year and 56% last quarter.
We saw gross margin improvement for our online advertising business where non-GAAP gross margin increased three percentage point from last year and last quarter to 62%.
Gross margin for our wireless business was 54% in the quarter, compared to 53% last year and 50% from last quarter.
Tuning to operating expenses, our non-GAAP operating expenses for Q3 2009 was 35.6 million, a decrease of 3% from the same period last year and an increase of 6% from last quarter.
Turning to operating income, non-GAAP operating income for Q3 of 2009 was 21.7 million, a decrease of 10% from the same period last year and an increase of 24% from last quarter.
Turning to non-operating income, interest and other income for Q3 of 2009 was 1.8 million, compared to 4.1 million last year and 2.1 million last quarter.
The year-over-year decrease in interest and other income was mainly due to lower interest rate on our cash, cash equivalents and short-term investments despite a net year-over-year balance increase of $37.2 million.
Turning to taxes, provision for income taxes for Q3 of 2009 was 3.3 million, compared to 4.4 million last year and two million last quarter.
As of September 30, 2009, our cash, cash equivalents and short-term investments were slightly below 600 million, up 37.2 million from last year and up 17.7 million from the end of last quarter. Cash flow from operating activities for the third quarter of 2009 was 29.1 million, compared to 24 million from the same period last year and 18.8 million from last quarter.
Q4 Guidance: Total revenues to be between 93 and 96 million, advertising revenues to be between 61 and 63 million and non-advertising revenues to be between 32 and 33 million. (Consensus is $99 mln)
(Q&A) First starting with 4Q advertising order log and obviously and you are guiding for another strong reacceleration of advertising sales in 4Q. And can you share with us what are the non-real estate sector where we continue to see strength? And also given that the advertising budgeting process is going to kick off pretty soon near the year end and so far what are the feedback have you heard from your advertising customer, especially given the advertising average spending were kept down by this year and should we expect significant step up from your multinational customers? And would they also allocate more budget to online?And also can you possibly comment on their perceived advertising prediction about the potential price increase across the board next year? Thank you.(A)I will take
your question here. And for the fourth quarter, obviously, we guided a pretty strong sequential growth for the fourth quarter compared in the third quarter. And this is stronger than the average growth rate we're typically seeing between the third and the fourth quarter in the years prior to Olympic Games. So basically, I think, this is a reflection of the continued recovery of the ad market in China. And so to answer your first question, I think, the sequential growth will come from almost automated sector for our advertising business probably with exception of the gaming - online gaming advertising and which we are relatively weak compared to the market. So for our other categories, in the major ones, we are going to see actually some strong sequential growth. And so this is really across the board and not related to any particular industry. But if you want to talk about industries, probably, telecom industry is still going to have a good upside in the fourth quarter, and FMCG continues to do well. And we also expect that automobile industry, probably, we are going to see year-to-year growth this quarter. Although we always are very, very strong in the automotive industry for advertising, but in the last two or three quarters actually we have seen some very slight decline on advertising for the automobile on a year-to-year comparison purpose. So for the fourth quarter, we are going to see some growth on a year-to-year basis. And so this is really, as I said pretty much across the sectors and so I think it's more a reflection of the general market condition, and also our strong position in the overall business in
this market. And relating the budgeting for next year and obviously we talk about this topic every year at this point, and at this point I think most of the people are still in the budgeting process for next year, and obviously we try to get their budget allocations as soon as we can, and we have been talking to
different clients in different sectors, and looks like, in general as I said, in my opening remarks that the market looks good and people are generally more optimistic about the economy and spendings for next year. So we're going to see probably a increase on overall advertising budget in the market next year, and obviously with online becoming more and more important in this advertising business and you'll see more allocation to the online advertising budget next year from I think a lot of different sectors in the industry. And next year we probably will see more allocations from telecom industry and more allocation from FMCG, and in the areas we historical have been very strong in automobile, financial service we're also going to see some reasonable increase in these sectors. So I think the overall sentiment is good, but at this point it's too early to comment exactly what kind of budget allocation our customer will have for next year, but the sentiment looks good. And also for the multinational companies, I think as we said before multinational companies have increasingly become less important in the overall market for the advertising because their spendings as a percentage of total market has been decreasing over the years and more-and-more local companies actually become more important customers for us in the past two years and that trend actually will continue in the future. And in terms of the pricing of our advertising for next year, we are going to be cautious in terms of our advertising pricing for next year and there are two trend here, is that obviously, given the increasing number of Internet users in China, we have and increasing traffic that there will be increasing pricing and I think that this is a function not only for online advertising but also we need to looking to the potential increase in the advertising pricing for other media companies in the traditional media for example.And recently we saw as some of the satellite TV stations raised their price for the first I think batch of the companies actually have releasing the pricing for next year. We saw something like 20 to 30% increase in the
advertising pricing for the listing pricing for some satellite TV stations. And I think there is a trend you probably - which you're probably are very familiar with China's media industry. There is a limitation further imposed by the TV and Radio Bureau in China that limits TV advertising time during the primetimes, for certain satellite TV and TV stations, that will decrease the allowed the airtime for some of the TV stations in China, and this may help to shift some of the budget from TV to online, to new media companies next year. So this is the positive sign. So we're looking to this area and we do plan to raise our price next year, but we'll do that in conjunction with [inaudible] market and as well as the performance and the practice of other media companies.
Can you elaborate to us what kind of - what potential revenue - what portion of the advertising revenue come from this service so far and what are your current plans to further capitalize this popular new inventories? (A)I think the rich media, and that includes rich media and the video advertising inventory, has been one of the most important factor for inventory growth in last year, I think. And so at this point, I think the total advertising revenue from rich media and video advertising accounts for almost 10% of our total advertising revenues. So I think this trend is going to continue next year. I think really, if you look at this year, this is really the - a very important starting point for video advertising in China for 2009. And the video advertising, I am talking about the insert video advertising with in the video content itself. Actually has seen very, very strong growth sequentially this year, in the second quarter we saw their number more than doubled from first quarter and in the third quarter we saw their number more than doubled again, compared to second quarter. So this is really growing very, very fast and so I think next year we are going to see more and more advertising from video inventories. And this is particularly true when we try to attract more and more FMCG kind of advertisers into the new media platform, video actually plays a very important role for attracting those advertisers and their budgets. So we will be very focused on building, continue to build our video platform and increase our product and content offering in this sector so we can increase our sellable inventory in this area and for the communities and abroad and I think this has been a very important growth area for us also. It's difficult for us to break down the advertising revenues from the - whether it's from the blog site of a individual blogger or from the blog channel. And if you combine these two, actually this already becomes probably the third largest contributor of our ad inventories among all the content channels we have in - on SINA. So blog has been a very important contributor for our advertising growth also. And next year, we are going to see probably more advertising from these community products. And so that's another reason we have been very focused on building our product in the interactive communities so we have more competitive offerings in the market to attract more advertisers.