SINA Misses Estimates in 4Q

Zacks Equity Research

SINA Corp. (SINA) reported fourth quarter 2011 earnings of 13 cents per share missing the Zacks Consensus Estimate by 3 cents. Reported earnings also decreased a whopping 68.7% year over year primarily due to margin contraction. Earnings in the quarter exclude one-time items but include stock-based compensation charges.

Quarter Details

Total revenue (excluding deferred revenue) increased 22.5% year over year to $128.7 million in the reported quarter, slightly above the low-end of management’s guided range of $128.0 million to $131.0 million.

The year-over-year growth in total revenue was primarily driven by higher advertising revenue in the quarter, up 25.7% to $103.7 million on a non-GAAP basis and marginally ahead of the low-end of management’s guidance range of $103.0 million to $105.0 million.

Non-advertising revenue increased 10.8% year over year to $25.0 million in the quarter. This was in line with the company’s guided range of $25.0 million to $26.0 million. MVAS revenue was $21.3 million, slightly up from $21.0 million in the year-ago quarter.

Gross profit on a non-GAAP basis climbed 16.0% year over year to $68.0 million in the quarter. Gross margin declined to 52.8% in the quarter from 55.8% in the prior-year quarter.

Advertising gross margin declined 400 basis points (bps) to 56.0% from 60.0% 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 declined 60  bps to 39.7% from 40.3% in the reported quarter.

Mobile-value-added-services (:MVAS) gross margin declined to 35.0% from 39.0% in the year-ago quarter, primarily due to unfavorable product mix and increased revenue share of MVAS partners.

Operating income, excluding one-time items and charges, came in at $1.4 million in the quarter compared with $22.4 million in the prior-year quarter. The year-over-year decline was primarily driven by higher operating expenses, which increased 83.8% year over year on the back of higher marketing expenditure, personnel-related expenses and infrastructure costs related to Weibo.com.

Interest and other income increased 57.0% year over year to $3.5 million in the reported quarter. Net income on a non-GAAP basis was $8.7 million versus $27.5 million in the year-ago quarter.

SINA exited the fourth quarter with cash, cash equivalents and short-term investments of $673.5 million compared with $742.1 million at the end of the third quarter. The decrease in the cash balance was mainly due to the acquisition of a 19% interest in MCOX for $66.0 million in the first quarter of 2011, a 9% interest in Tudou Holdings Limited for $66.4 million in the third quarter of 2011 and a $50 million investment in Yunfeng Funds for the purpose of investing in Alibaba Group in the fourth quarter of 2011.

Cash flow from operating activities for the fourth quarter of 2011 was $19.0 million compared with $14.3 million in the prior quarter.

Guidance

SINA expects non-GAAP net revenue to be between $101.0 million and $104.0 million for the first quarter of 2012. Non-GAAP advertising revenue is expected in the range of $78.0 million to $80.0 million, while non-GAAP non-advertising revenue is projected in the range of $23.0 million to $24.0 million.

Our Recommendation

We believe that SINA remains a premier company owing to its strong product pipeline, continuous investment in product development and marketing and a robust user base for its E-Commerce and Weibo offerings.

However, earnings growth continued to disappoint primarily due to higher operating costs related to its social networking platform Weibo. We believe that any weakness in advertising revenue will impact SINA’s ability to counter increasing operating expenses, which in turn will hurt its bottom line going forward.

We believe that increasing competition in the domestic market from Baidu Inc. (BIDU), SOHU.COM (SOHU), Tencent and Alibaba will hurt profitability over the long term. Further, we believe that the increasing regulations from the Chinese Government remain the primary concern over the stock going forward.

We remain Neutral over the long term (6-12 months). Currently, SINA has a Zacks #2 Rank, which implies a Buy rating in the near term.

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