SINA Beats, Outlook Disappoints

Guidance Overview
 
SINA Corporation’s (SINA - Analyst Report) third quarter revenue guidance of $91.0 – $94.0 million was below the Zacks Consensus Estimate of $97.0 million. The shares fell 1.12% and closed at $30 yesterday when the company’s lower third quarter 2009 outlook disappointed investors.

SINA expects Advertising revenues to be $60.0 – $62.0 million and non-advertising revenues to be $31.0 – $32.0 million in the third quarter. The company remains guarded on advertising spending, particularly brand advertising, as consumers remain cautious.

Economic growth in China has continued to slow down in the global economic downturn. SINA is also facing severe competition in its mobile business and expects it to be flat in the next few quarters. Competition in the online brand advertising field in China is fierce crowded by big players such as Sohu.com Inc. (SOHU - Analyst Report), Shanda Interactive (SNDA) and Baidu, Inc. (BIDU - Snapshot Report).

While year 2009 is expected to be tough for SINA with low visibility for its advertising business, we expect sequential improvement as spending recovers. We believe that SINA’s business will continue on the strength of solid fundamentals and it will emerge as a strong company when the recession ends.

Results Analysis

While guidance was weak, the company’s second quarter results beat the Zacks Consensus Estimate of $88.0 million and non-GAAP EPS estimate of 24 cents.

Revenue for the second quarter was $90.3 million, down 1.2% year over year but a huge improvement of 22.4% sequentially. Revenue exceeded the company's guidance of $85.0 – $89.0 million. This reflects strong execution of the company’s online advertising business in China, which grew 35% sequentially.

Moreover, SINA benefited from the government's stimulus packages in the second quarter. Also, the mobile business outperformed in the quarter, growing 26% year over year and 7% sequentially.
 
Gross margin was 56% in the quarter, down from 62% last year and up from 52% last quarter. This was due to falling advertising revenues while advertising cost of revenues, primarily those that are bandwidth-related, increased. Margin improved sequentially as advertising gross margin improved in the quarter.

Operating expenses were flat year over year but increased 23.0% sequentially, mainly due to higher marketing costs, bonuses, commissions and allowances for bad debt.

Despite higher expenses in the quarter, non-GAAP EPS of 29 cents was up from 23 cents last quarter due to lower taxes and lower share count. EPS was down from 39 cents last year.

To increase shareholder’s wealth, SINA repurchased approximately 2.5 million shares for $50 million. The company expects to continue with its repurchase program in future quarters.

Update on Focus Media Acquisition

SINA had entered into a definitive agreement with Focus Media Holding Ltd. (FMCN - Snapshot Report) in 2008 to acquire substantially all of the assets of Focus Media's digital out-of-home advertising networks, including LCD display network, poster frame network, and in-store network.

During the earnings call, SINA said that the $1.4 billion transaction is still undergoing antitrust review by the Department of Commerce of China. The deal is unlikely to be approved by the end of September 2009; in that case, SINA may alter the terms of the agreement to complete the transaction or extend the date of closure of the deal.

This merger would have been the most important merger in the media sector, enabling SINA to compete against other media giants such as Beijing-based China Central Television and Shanghai Media Group. The lack of uncertainty in the closure of the deal poses further risks and is likely to lead SINA’s shares down.

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Read the full analyst report on BIDU

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