SINA Reports Mixed 2Q

Zacks

SINA Corp. (SINA) reported a mixed second quarter with earnings of 5 cents, much better than the Zacks Consensus Estimate of a loss of 9 cents. However, reported revenue was slightly short of the consensus mark.

Quarter Details

Total revenue (excluding deferred revenue) jumped 11.1% year over year to $127.0 million in the reported quarter, slightly above the low end of management’s guided range of $126.0 million to $129.0 million.

The year-over-year growth in total revenue was primarily driven by higher advertising revenue in the quarter, up 12.4% year over year to $103.1 million, marginally ahead of the low end of management’s guidance range of $103.0 million to $105.0 million.

Non-advertising revenue increased 5.8% year over year to $23.8 million in the quarter. This was in line with the high end of the company’s guided range of $23.0 million to $24.0 million. Mobile-value-added-services (:MVAS) revenue was $17.7 million, slightly down from $19.5 million in the year-ago quarter.

Gross profit on a non-GAAP basis climbed 2.6% year over year to $65.3 million in the quarter. Gross margin declined to 51.4% in the quarter from 55.7% in the prior-year quarter.

Advertising gross margin declined to 53.0% from 59.0% in the prior-year quarter. The year-over-year decline was primarily due to increased spending on production-related labor, infrastructure and content. Non-advertising gross margin expanded 150 basis points (bps) to 53.8% in the reported quarter. MVAS gross margin remained flat at 39.0%.

Operating loss, excluding one-time items and charges, came in at $4.5 million in the quarter compared to a profit of $4.2 million in the prior-year quarter. The year-over-year decline was primarily due to higher operating expenses, which increased 9.7% year over year on the back of higher personnel-related expenses and infrastructure costs related to Weibo.com.

Interest and other income increased 12.0% year over year to $4.8 million in the reported quarter. Net income was $3.8 million or 5 cents compared with $13.3 million or 20 cents in the year-ago quarter. Including stock-based compensation but excluding one-time items, net income was $65.6 million or 10 cents in the reported quarter.

SINA exited the second quarter with cash, cash equivalents and short-term investments of $716.3 million compared with $647.9 million at the end of the first quarter. Cash outflow from operating activities in the quarter was $8.1 million.

Guidance

SINA expects non-GAAP net revenue to be between $145.0 million and $148.0 million for the third quarter of 2012. Non-GAAP advertising revenue is expected in the range of $120.0 million to $122.0 million, while non-GAAP non-advertising revenue is projected in the range of $25.0 million to $26.0 million.

Our Recommendation

We believe that SINA remains a premier company based on 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 Sohu.com Inc. (SOHU), Tencent and Alibaba will hurt profitability over the long term. Further, we believe that increasing regulations from the Chinese Government will remain the primary concern for the stock going forward.

We remain Neutral over the long term (6-12 months). Currently, SINA has a Zacks #3 Rank, which implies a Hold rating in the near term.

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