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Sina Corporation (SINA) Q1 2019 Earnings Call Transcript

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Sina Corporation (NASDAQ: SINA)
Q1 2019 Earnings Call
May 23, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the SINA's Earnings Conference Call for the First Quarter of 2019. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise this conference is being recorded today the 23rd of May 2019.

I would now like to hand the conference over to your first speaker for today, Ms. Sandra Zhang. Please go ahead ma'am.

Sandra Zhang -- Investor Relations

Thanks, operator, and hello everyone. Welcome to SINA's Earnings Conference Call for the First Quarter 2019.

Joining us today are Chairman and CEO, Charles Chao; and our CFO, Bonnie Zhang. This call is also being broadcast on the Internet and is available through our IR website.

Now let me read you the safe harbor statement in connection with today's conference call. Our discussion today will contain forward-looking statements, which involve inherent risk and uncertainties, that may cause actual results to differ materially from our current expectations. SINA assumes no obligation to update the forward-looking statement in this call and elsewhere. For detailed discussion of these risks and uncertainties, please refer to our latest Annual Report on Form 20-F and other filings with the SEC.

In addition, I would like to remind you that our discussion today include non-GAAP measures, which mainly exclude stock-based compensation and certain other items. We use non-GAAP measures to gain better understanding of SINA's comparative operating results and future prospects. Please refer to our earnings release for more detailed information on reconciliation of GAAP to non-GAAP measures.

During the call, we may also discuss non-GAAP measures for Weibo, which applied the same methodologies we use to calculate non-GAAP measures at the SINA group level. After management remarks, we will open the lines for brief Q&A session.

With that, I would like to turn the call over to our CFO, Bonnie.

Bonnie Yi Zhang -- Chief Financial Officer

Thank you, Sandra, and thank you all for joining our conference call today. Let me walk you through the operational and the financial highlights for the first quarter. Before the detailed financial review, I would like to remind you that, my prepared remarks would focusing on non-GAAP results, and all the comparisons are on a year-over-year basis unless otherwise noted.

Let's start with an overview of the first quarter 2019. SINA's net revenue for the first quarter was -- were $472.5 million, an increase of 8% or 14% on a constant currency basis. SINA's operating income was $114.2 million, an increase of 21% or 28% on a constant currency basis. Net income attributable to SINA was $28.9 million, and the diluted EPS was $0.40.

Now let's turn to key financial items. SINA's online advertising revenue for the first quarter was $388 million, an increase of 6% or 12% on a constant currency basis. The growth was primarily driven by an increase of $38.2 million from Weibo advertising revenue and it was partially offset by the decrease in portal advertising as well as negative currency translation impact.

On the monetization front, Weibo's online advertising revenue for the first quarter was $341.1 million, up 13% or 20% on constant currency basis. Weibo key account business continued its strong momentum, with advertising revenue growing 31% or 39%, on a constant currency basis. The growth was fueled by the FMCG sector which will adopt Weibo's differentiated social marketing tools to enhance brand awareness, accumulate social assets and leverage KOLs influence to connect and engage with a broader Internet audience through Weibo. The sector also demonstrated a stronger resilience in the macro uncertainty by virtue of its industry nature.

Weibo SME sector grew 5% or 12% on a constant currency basis. The growth was mainly derived from e-commerce sector which team focus on enhancing targeting capability and optimising tailor-made auto products to drive higher ROI for these customers. However the growth from new initiatives were largely offset by market demand constraint from O2O categories in online gaming sector, primarily due to micro challenges regulations and a competition in the ad inventory supply.

Turning to portal, portal ad revenue for the first quarter were 46.9%, a decrease of 27% or 22% on a constant currency basis, mainly resulted from a budget cutbacks from SME customers.

Turning to non-advertising business, SINA Finance ad revenue for the first quarter were $84.5 million, up 19% or 26% on constant currency basis. The increase was derived from the incremental revenue from Weibo to live streaming business and a seamless Fintech. Portal non-ad revenue for the first quarter was $32.3 million up 34% or 42% in our constant currency. The increase of portal non-advertising revenue was driven by the increase in revenue from the micro-loan facilitation business, which was underpinned by substantial growth of transactions, facilitated through SINA's Fintech platform.

Turning to gross margin. Gross margin for the first quarter was 76%, flattish to year-over-year. Advertising gross margin was 79% up from 78% prior year. Non-ad gross margin for the first quarter was 63%, slightly down from 64% last year.

Now moving on to operating expenses, in the first quarter operating expenses totaled 245.3 -- $245.3 million up to 3%. Sales and marketing expenses took approximately 30% of SINA net revenue, down 1 percentage points from last year, largely attributable to a more disciplined execution of channel marketing strategies.

Operating income, growing 21% to $114.2 million, representing an operating margin of 24% up from 22% last year. Under the GAAP measure, non-operating income for the first quarter of 2019 was $77.7 million, compared to a non-operating income of $22.6 million for the same period last year. Non-operating income for the first quarter, included an $80.8 million net gain of sale of investments, fair value changes and an impairment on investments which is excluded under non-GAAP measure of $13.1 million net interest and other income and a $16.3 million net loss from equity method investments, which is reported one quarter in arrears. Please refer to our earnings release for more detailed information about non-operating items for the same period last year.

Turning to tax. Under GAAP measure, income tax expenses were $65.2 million in the first quarter, compared to $18.8 million last year, largely attributable to the deferred tax liability recognized from the fair value changes of the investments. Net income attributable to SINA in the first quarter was $28.9 million or $0.40 dilutive net income per share.

Now let me turn to the balance sheet and a cash flow item. As of March 31, 2019, SINA's cash, cash equivalents and short-term investments totaled $2.1 billion, compared to $2.3 billion as of December 31, 2018. For the first quarter, net cash provided by operating activities was $93.5 million, capital expenditure totaled $10 million and depreciation and amortization expenses amounted to $11.1 million.

With that, operator, please open up the call for questions.

Questions and Answers:

Operator

Thank you ma'am. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) We have the first question from the line of Eddie Leung. Please go ahead.

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Good evening. Couple of questions. The first one is about your full year guidance. Just wondering, if there is any update on the full year revenue guidance for the SINA group? And then secondly, I heard that one issue on the first quarter advertising weakness on SINA Portal, is below SME, cutting their advertising budgets. So could you talk about the key accounts budgeting process for 2019? For example, what are the Top 5 advertiser categories for SINA Portal and what's the trend? Thank you.

Bonnie Yi Zhang -- Chief Financial Officer

Eddie, I think with the macro situation right now, I'm sure you're aware, we just finish our Weibo's conference call. So, the growth rate of ad advertising for Weibo for second quarter, we have trimmed down in terms compared to the market expectation. So I think initially the market expects about 20% growth on constant-currency basis. And right now we're reporting about, somewhere about 7% to 10% of growth on constant currency. So that would effectively have impact on the SINA group as a total, same logic will be applied to the SINA Portal as well. I think we're talking about from ad -- total ad advertising revenue for the full year compared to the initial estimates, we have been given, in the early part of the year, we see that forecast being challenging in the current market conditions.

So, I would say that number needed to be further discounted, probably, I would say another 10% -- 10% to 15% discount. Most of those, I think the large part of it will come from the Weibo part, even though I'd still hope the relative positive for the latter part of 2019 as the -- some segments recedes our recovery progress at this moment. But, just with the large uncertainties for other industry or the macro condition, so would rather be there cautious (inaudible). For the non-advertising part, I think it will -- our estimates continue to be a relative consistent with the initial numbers that we communicated last time. So that would be the comments on your total full year guidance part.

On the SME cutback, yes, so -- the portal parts, yes we have experienced quite significant decline in the SME revenue. I think that goes back to the overall industry issue right now. On the one side you have relative weak demand, and on the other -- on the supply side, we see a surge of the ad inventory. So that has leads to the cutback. I think of two things, one is, you see ad budgets get more focused to those large platform or top platform in the marketplace. Second thing, I think which everyone is experiencing is the decline in the -- on the CPM or the CPC price.

So, these are the -- I think the two factors driving the SME cutbacks. For the key accounts, goes back to -- I think you're being asking the questions on the industry performance, the top industry for portal, the key industry continues to be -- I think FMCG become even more -- percentage wise getting higher. So, your FMCG is the -- I'm sorry, the financial segment is the largest segment for a key account, that takes about 21%.

The second comes in as the auto. Even though I think auto has been relative weak. But still, it's big, it continue to be the large segment for SINA. It takes about 20%. But that percentage has been significantly come down compared to prior quarters. If I remember correctly, auto segment used to be in the 30s, even the 40s for SINA group -- for the portal business. And the third category is the IT, those are -- we're talking about the telecom, the cellphone makers, they takes about 14%.

FMCG, it's not like Weibo, you know that comes at the fourth place, takes about 11% of our total key accounts revenue. And number five, it's Internet service, that contract is about 4% -- 7%.

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Well done. Thank you.

Operator

We have the next question from the line of Juan Lin. Please ask your question.

Juan Lin -- 86Research Limited -- Analyst

Hi, good evening, management. Thank you for taking my questions. So, I have two questions. The first one is on SME pricing. You mentioned that, due to the lack (ph) of supply of inventories and also macro slowdown, there is a price or CPM decline across the Board for SME business. So I wonder, whether we already see SME pricing in terms of the year-over-year decline already bottom. And then going forward reach the most critical factor for SME pricing to improve from here. So, if we rank the factors including the macro improvement, mac (ph) regulatory improvement on certain categories and also our only effort in expanding user base and including (inaudible) competition. So how should we look at the ranking?

And the second question is on key account brand advertising. So, since SME advertising took the concentrate -- or gradually concentrating on the top platforms, especially the platforms that have been releasing a lot of incremental inventories. I wonder if you have also noticed similar trends for KA advertiser. Thank you.

Bonnie Yi Zhang -- Chief Financial Officer

I think, for SME you're asking a question probably just go through the sequence of your question. At this point and we haven't seen the price being bottom out. I think on the previous calls with Weibo, Guowei indicated, even in the month -- the current month we'll continue to see price down for the CPM. So that trend probably will continue for a period of time. I don't have a relative or affirmative answer in terms of when that trend will be a reversal. So, but I think one thing we did need to pay attention to the comps, right? So I think first half 2018, where every platform was running in a very high growth rate and the relative robust demand for ad, so, I would think going to the second half of 2018 with the ease -- as the comps become relatively easier. So you might see the -- at least the decline trend, and could it be slow down or even the -- going into a period of time that price going to a flattish sort of a trend on year-over-year basis.

So that would be my personal taking on that. So to reverse that, of course, one thing, I think there is elements that's non-controllable by the company. But, I would have rather to pay a bit more attention on those one element we would be able to control. I think, there is two things. One is that to create the demand. One is coming from the demand part, it really comes out -- comes with more customers.

So as you have more customer bidding on your inventory, you relatively have a tendency, your price will go up. I think, that's one key and that's something we could working on. And as I believe, we already addressed some of those initiative in the previous call, as each primarily we have being reshuffled our distribution channel, has redesigned our incentive scheme for SME teams, so as well as the agency rebates. So these efforts really is coming to attract new demands from customers. And also some of the new segments, we will probably -- historically we have not put a too much efforts or attention to, and these are the area we're spending more resources. So that's the one thing on the demand side and more customers -- the more bidding process -- more bidding on the platform. The other thing it's the product -- the another controllable element will be the products. I think the product is where redesign some of those SME products that based on the experience we had on our key accounts. So these are ones we could distinguish our value proposition from other platforms.

So, for example, using more KOLs, for example those data package that specifically designed for certain industry customers. So these are the things I think at our end, what we could address in the next -- right now we started to address, and I think we're seeing some progress in the current quarter and probably more in the quarters to come. So, for the comments on the macro order, also the inventory supply, I think that goes back to my point, those are elements we would not be able to control. So there eventually, I think they will reach to a balanced level. But when and how this will come or they realize, I think at this point we have very little visibility to comment on that.

So then, go back to your question on the key accounts, you're being asking whether -- the key accounts have been repeating the same sort of path of SMEs. So I would say at this moment we haven't seen any indicators. I think, I did made a comment on the Weibo's call there, based on the frame contracts we have signed year-to-date. We see quite meaningful growth on the frame contract. Even with the current macro situation and a number of the difficulties our customers experiencing. I think our key accounts, we have a very distinguished value proposition and a different ad products offered in the marketplace. So those are unique aspects that supports our continued growth in this particular customer segment.

And also on the budgets part we've been talking in the past, that key accounts budgets are not only the marketing budgets with e-commerce being penetrated by various -- on the customer level big brands are going to using e-commerce a lot more frequent compared to years ago. So we're talking about two sets of budgets, our marketing dollars, brand budgets and the e-commerce budget. So, we're -- I think our team is ready, not only addressing the traditional brand issue or the brand coverage audience group type of thing. We're also in the marketplace compete for the brand e-commerce dollars, as we demonstrated particular with (inaudible) alliance that we can offer a very unique data point for those customers.

Juan Lin -- 86Research Limited -- Analyst

Thank you, Bonnie. It's a very comprehensive answer. Thank you very much.

Operator

We have the next question from the line of Alicia Yap. Please ask your question.

Alicia Yap -- Citigroup -- Analyst

Hi, good evening, Charles, Bonnie and Sandra. Thanks for taking my question. First question is related to the non-ad revenue line. So this looks like this line is not too bad for each quarter, it's doing quite well. Is that driven by your Fintech, even we should have lapsed out the tough comp. And what have you done to revive the business? And any comments on the progress of the overall Fintech strategy? Just one quick follow-up on macro, if I may. So given SINA has been through a full macro cycle. How would you characterise what we have seen so far for the ad budget sentiment this year versus the previous cycle? Thank you.

Bonnie Yi Zhang -- Chief Financial Officer

On the Fintech part, I think last year, it's a year for the company to make a lot of adjustments to respond to the regulatory changes. We've been spending resources to time, to adjust our products, to ensure those products are well in compliance with the updated rules and regulations. I think the -- and for 2019, it's -- I think by the first quarter where they're ready to capture their high growth markets in the segment. We'll continue to believe that SINA has its very unique advantage in the Fintech business. A typical Fintech requires few elements. One is traffic -- your traffic; second, your brand and what we call the credibility of our platform; third it's the -- the fund in resource. So I think for SINA -- the first two of their well addressed by their current resource we have. We do have strong traffic flow from Weibo and we do have a good support from SINA News app and SINA Finance app, in terms of quality users and users that has intention and ability to borrow money.

And SINA to brand equity has been viewed for years and that very essential for a Fintech business to be accepted in the marketplace and to be distinguished from other smaller platform. So number three, it's the funny issue. I think that will part of the efforts we were able to address in the last 12 to 18 months, with the one-sided to being more compliance with the regulations, and on the other side has the fund resources be ready for us, to expand the platform.

So I think all these elements attributable to the growth in the Fintech area. We maintain relatively optimistic for this segment for the rest of the year, as we believe there will be a good recovery in the segment. In general, we take a very cautious steps in terms to grow and expand for our micro loan business. We still believe that this is --will need to be very well balanced in terms of risk and reward. We taking very conservative accounting approach to record our revenue and to ensure our reserve for delinquency in the loans are very well addressed in the -- in our P&L.

So with that, like I said, we were relatively optimistic in the growth for this segment for the rest of the year. In terms of the macro part for the budget, I think, I'm sure you have a lot of channel checking. We from a company perspective -- I think we started -- we already have been communicated with the market, even in the very early part of 2018. It will be very challenging. Just we see, even the micro data has recovered a little bit in the first quarter, but that recovery didn't seem to be last long enough.

Fourth, then the April -- the month of April data hasn't been that impressive, from all different perspectives. So that in our view, with the heat up of the trade war that will continue to weigh the sentiment in the ad industry. And ad industry in general respond a little bit later to the economic cycle. It comes just with the budgets planning and peoples decision on things. So, it's the -- in general you see few quarters lag.

So, I think the sluggish growth perspective, probably will continue to going to the second half. Particular for those large segments like auto, we don't expect that we'll have a fast recovery in the marketplace. However, few other segments, for example, gaming with the clarity on the regulation part. Education, I think that's another big segment. They got hit pretty bad in the fourth quarter, even part of the first quarter, we'll start to see some activities. But whether that would have continued to recovery -- to recover in a pace we have seen, I think largely resides on companies own P&L. I'm sure you would see all those sales and marketing for large Internet companies are cutting back. So, that has no difference to the traditional companies who are talking about. And also depends their profitability level, so that would driving the sustainability of whether the recovery will continue.

Charles Chao -- Chief Executive Officer and Chairman

Alicia, let me just add a couple of points to Bonnie's comment. Your last question, on the macro impact. I mean, yes we have seeing many cycles -- experienced many cycles in the past. And, I will say the difference this time is that, previously, I mean for every cycle you see Internet markets to grow and also that, at the low time, at a macro condition, I mean, you see more traditional customers adopt Internet for marketing, and also you probably aware that a lot of demand for Internet marketing actually also coming from the Internet service itself like a gaming, like e-commerce, like auto, all these type of Fintech, these type of demand. And so, in the previous cycles, you saw more and more of these kind of demand from the new sectors, I mean for Internet services. And, in addition to the more adoption by traditional customer for Internet marketing. So in the previous cycles you see, maybe a macro-economic condition, might be bad but as you see the demand increase for Internet marketing. Although, may be in the down-time the marketing demand increase is slower but it's still increasing every time. But this time I think the difference is that, the entire Internet market is not really going too fast. As you know that, the Internet population in China has come to a very slow growth rate right now.

The competition nearly is for the time spent at different site, different app, and with more player coming to the markets, see a lot more suppliers, as you can see the impact on the SME customers, in terms of pricing, in terms of total revenue allocations between different sites and so forth. So I think this time probably is more challenging. Much more challenging than we have seen before. And in addition to that, as Bonnie just mentioned macroeconomic condition is not going to recover very quickly, that will have an impact on both KA and SMEs. For the KA, I think -- on we Weibo side, we're still very competitive as we have a lot of advantages over other players, in this market to grow markets -- at a pretty healthy rate. But SME side, we're facing more competition, and you can see from the results.

And, for the portal side, I think the hit is on both KA and SME. On the KA side because the product is more relying on the financial, auto, FMCG, and IT, Internet these five sectors. And we probably still very strong in financial area, because you know SINA Finance is very strong, and it was still growing the market very well. But on auto side, on the FMCG side, on the Internet side, I think, we hit by the market condition pretty badly. So it's like you're going to see growth in the financial area, probably more than offset by the decline in other sectors. I mean we have seen, so it's a challenging market. And I think it will get better if auto market start to recover. And SME side probably, on the portal side, also very challenging because Internet scale were priced more in the market. And so in terms of the competition, I think our portal SME customer -- business will be disproportionately affected, are making more high degree, and so this is another challenging market.

So overall I think it's different from before. It's more challenge and -- but I hope that when the market starts to recover, our Weibo business will grow faster, and hopefully we're going to also catch up and SME side for portal, we can continue to grow our user base for our mobile applications. That will be probably an overall summary for your question.

Operator

I would like to hand the call back to Sandra for any closing remarks.

Sandra Zhang -- Investor Relations

Thanks, operator. This concludes our conference call today. We'll see you next quarter.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

Duration: 36 minutes

Call participants:

Sandra Zhang -- Investor Relations

Bonnie Yi Zhang -- Chief Financial Officer

Charles Chao -- Chief Executive Officer and Chairman

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Juan Lin -- 86Research Limited -- Analyst

Alicia Yap -- Citigroup -- Analyst

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