Highlights From SINA's Q2 Conference Call: Despite Strong Pick-up in Q2, Visibility is Still Low

September 1, 2009 8:48 AM EDT

Sina Corp. (Nasdaq: SINA) reports Q2 EPS of $0.29, ex-items, inline with the analyst estimate of $0.29. Revenue for the quarter was $90.3 million, versus the consensus of $88.13 million.

Highlights From SINA's Q2 Conference Call:

• Sees Q3 sales of $91-$94 million, versus the consensus of $96.12 million.
  
• (CEO) For Q2, our advertising revenues reached high end of our guidance and our non-advertising revenue beat our guidance as our mobile business outperformed.
  
• However, on a year-over-year basis, we still experienced a decline in advertising revenues. Q2 of last year was a particularly strong quarter and we had 58% year-over-year growth due to the Olympic factor.
  
• For Q2, we saw sequential growth in advertising revenues in almost all major categories including automobile, housing and financial service, FMCG and IT. But on a year-over-year basis, we had quite significant declines in IT and the financial service and a modest decline in automobile.
  
• For automobile, the largest ad revenue sector for SINA, given the sequential rebound has been strong, we experienced a year-over-year decline, partly because most of automobile advertising has been focused more on driving salesvolume instead of promoting brand. And partly because there were fewer new models introduced in this quarter, compared to the same period last year, when many auto clients rushed out new model launches before the Olympic games. The categories that experienced year-over-year growth were housing, FMCG and education. We expect these patterns will continue in Q3.
  
• Overall, the year 2009 will be a difficult year for SINA's advertising business. As there are more signs for the economic recovery underway, we expect our advertising business will continue to improve sequentially for the remaining year.
  
• In Q2, our mobile business grew 26% year-over-year, and 7% quarter-over-quarter. However, we see challenges to grow mobile business revenue further in near future, given the intensified competition. As a result, we expect our revenues from mobile business will be largely flattish in the next couple of
  quarters.
  
• For the year 2009, we still expect our mobile business may grow approximately 10 to 20% in revenues.
  
• During Q2, China Mobile (NYSE: CHL), China Unicom (NYSE: CHU) and China Telecom (NYSE: CHA) all launched their 3G service. We believe 3G will provide new opportunities for SINA mobile business going forward over the long-term.
  
• First, I would like to give you an update on our merger process with Focus Media's out-of-home
  advertising business. Given our understanding of such a review process, we believe it is unlikely that approval will be obtained by the end of September, which is the extended deadline for the deal closing agreed by both parties. We are currently in discussion with Focus Media management in either extending the closing deadline or altering the deal structure. We have not reached any conclusion on such discussion at this point.
  
• Secondly, 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...Under the agreement, SINA will inject its online real estate business into its majority-owned subsidiary, China Online Housing...Substantially all revenues for SINA real estate came from online advertising. Advertising revenues from SINA real estate business accounted for approximately 15% and 16% of SINA's total advertising revenues for the fiscal year 2008 and for the six months ended June 30, 2009, respectively...Upon the confirmation of the transaction, 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.
  
• (CFO) Total revenues for Q2 came in at 90.3 million, which exceeds our guidance and represents a year-over-year decline of 1%, and a sequential growth of 22%.
  
• Our online advertising revenues, which exclude search revenues, for Q2 totaled 57.8 million, representing an 11% decline from the same period last year, and a 34% increase from last quarter.
  
• For Q2, advertising revenues from China was 57.2 million, which declined 11% from the same period last year but grew 35% from Q1.
  
• On a sequential basis, automobile and real estate, our two largest sectors, performed well. Together they represent 65% of the advertising revenue growth from Q1.
  
• Despite the strong pick-up in the second quarter, visibility is still low.
  
• Customer sentiment, while much improved from the low point experienced at the beginning of the year is still fragile and has been fluctuating on a month-to-month basis.
  
• Compared to a year ago, average spending per customer in China decreased 10% in Q2 of 2009 and the number of customers in China dropped 1%.
  
• For Q2 of 2009, our non-advertising revenues reached 32.5 million, representing an increase of 23% year-over-year and 6% quarter-over-quarter
  
• Our mobile value-added services, or MVAS, generated 30.9 million in total revenues, an increase of 26% year-over-year and 7% quarter-over-quarter.
  
• Revenues from 2G products were 21.4 million, up 1% from last quarter. SMS and IVR, which represent 96% of the revenues from our 2G products grew 3% quarter-over-quarter.
  
• Revenues from 2.5G products were 9.5 million, up 22% from the last quarter. MMS and WAP, which make-up the majority of our 2.5G revenues, increased 7% quarter-over-quarter.
  
• Our non-GAAP gross margin, which excludes stock-based compensation and intangible asset amortization for Q2 of 2009, was 56%, compared to 63% in the second quarter of 2008 and 53% last quarter.
  
• Interest and other income for Q2 was 1.7 million, compared to 4.1 million for the same period last year and 3.1 million from last quarter. The decrease in interest and other income was mainly due to lower interest rates on our cash, cash equivalents and short-term investments.
  
• As of June 30, 2009, our cash, cash equivalents and short-term investments were 582 million, compared to 540.9 million at the end of Q2 '08 and 603.8 million at the end of 2008.
  
• Let me now turn to our guidance for the third quarter of 2009. We are targeting total revenues of 91 to $94 million. For online advertising, we are targeting 60 to 62 million. For our non-advertising business, we are targeting 31 to 32 million.
  
• (Q&A) My first question maybe deals with the demand outlook. Can you give us some more color on your framework agreements? How much of those that have been allocated have been spent kind of year-to-date and do you expect to be spent in the third quarter? (A)And I guess the jist of my question is really trying to understand -- with the kind of gradual improving sentiment in China, should we be expecting some type of a budget flush for advertisers to go ahead and spend whatever they've allocated to the budget but haven't spent in the fourth quarter? Or should we be more expecting the fourth quarter to be kind of a normal, sequentially slightly weaker quarter compared to the third quarter? And then I have maybe one or two follow-up questions. (A) This is Charles. On the execution of the frame contract, I don't have very, very detailed specific numbers. But my understanding is these contracts are pretty much in the plan, in terms of expanding based on our expectations. And I that think overall, there's not really too much big surprise to us except, as Herman mentioned, that overall sentiment is still quite cautious. And so, although we are seeing people spending money - but they are more cautious in terms of giving more specific long-term commitments, firm commitment, particularly on the campaign, whatever. And so, you're seeing a gradual improvement. But on the other hand, if the sentiment is - it's much better than the first quarter we have experienced. But, overall, it's still a cautious mood for the overall advertising market. And for third quarter, for example, our current guidance is probably a little bit lower than our original expected, probably because there are some uncertainties in terms of some budget coming at the end of quarter there. It was not expected, basically.
  And so at this point, the visibility for fourth quarter is still quite low. But obviously given our experience and our understanding of the market and given our contact communication with the clients, we believe fourth quarter will still be a sequential growth quarter from third quarter. But it's hard at this point to see how much growth we'll have for fourth quarter sequentially.
  
• And then maybe just a question or two on the M&A. First for you Charles, could you maybe discuss what are some of the possible alternatives that are available to you in Focus Media, apart from an outright asset purchase that might need commerce department approval? In other words are there ways for the two companies to work together and achieve many of the benefits that you envision from the asset purchase, but through some type of a structure that would not need commerce department approval? Any type of just kind of color or thoughts on what's the available alternatives would be helpful. And then finally for Herman, if you could maybe give us what the general range of the operating margins of the E-House side of this carve out is going to be? That would be helpful as well. (A)On the Focus Media deal, at this point, obviously, we have three options. And one is continue to try to complete the deal with extended deadline, and which is very easily to achieve if both party agrees to extend the deadline. And we are in discussion with Focus Media's management and to see if this is something that we're going to proceed, given our understanding of antitrust review process here. I think this is going to be taking longer time, but it is achievable. I mean, for the - if we want to go to that particular direction. And the second option, obviously, we try to alter the structure so we can, just like you said, try to achieve some of the synergies we talked about, and we envisioned when we did the deal, but with less than a complete merger for these two companies. But I really cannot really get into a lot of specifics on some of the alternative structures because a lot of these are still in discussion and we really - it's probably too early for us to share some of the ideas at this point. But, obviously, in terms of realizing the synergies between these two companies envisioned - a lot of things we could have done if this merger was completed. These alternative structures will be less effective. And the third option, obviously, is to do nothing. But at this point, we still think that under the idea of the merger of these two companies and to try to create lot of synergies is a great idea, and we'll try to make every effort to make the deal happen. And so that's about Focus Media and I will let Herman to handle the second question here.

SINA Corporation operates as an online media company and information service provider in the People's Republic of China.

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