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SINA Corp. (SINA - Analyst Report) reported a loss of 21 cents per share in the first quarter of 2012, deteriorating drastically from the year-ago earnings of 25 cents per share. The weaker-than-expected result was primarily attributed to higher operating expenses in the quarter.

Including stock-based compensation of $3.8 million but excluding one-time items amounting to $4.1 million, loss per share stood at 27 cents, in line with the Zacks Consensus Estimate.

Quarter Details

Total revenue (excluding deferred revenue) increased 6.3% year over year to $101.5 million in the reported quarter, slightly above the low end of management’s guided range of $101.0 million to $104.0 million.

The year-over-year growth in total revenue was primarily driven by higher advertising revenue in the quarter, up 8.6% to $78.5 million on a non-GAAP basis and marginally ahead of the low end of management’s guidance range of $78.0 million to $80.0 million.

Non-advertising revenue inched down 0.8% year over year to $23.0 million in the quarter. This was in line with the low end of the company’s guided range of $23.0 million to $24.0 million. MVAS revenue was $19.0 million, slightly down from $21.3 million in the year-ago quarter.

Gross profit on a non-GAAP basis declined 8.7% year over year to $44.4 million in the quarter. Gross margin declined to 43.8% in the quarter from 51.0% in the prior-year quarter.

Advertising gross margin declined to 43.9% from 54.3% 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 expanded 270 bps to 43.3% from 40.3% in the year-ago quarter. Mobile-value-added-services (MVAS) gross margin remained flat at 39.0%.

Operating loss, excluding one-time items and charges, came in at $22.7 million in the quarter compared with a profit of $7.1 million in the prior-year quarter. The year-over-year decline was primarily driven by higher operating expenses, which increased 61.4% year over year on the back of higher marketing expenditure, personnel-related expenses and infrastructure costs related to

Interest and other income increased 31.0% year over year to $3.5 million in the reported quarter. Net loss on a non-GAAP basis was $17.8 million versus income of $13.9 million in the year-ago quarter.

SINA exited the first quarter with cash, cash equivalents and short-term investments of $647.9 million compared with $673.5 million at the end of the fourth quarter. Cash outflow from operating activities in the quarter was $10.5 million.


SINA expects non-GAAP net revenue to be between $126.0 million and $129.0 million for the second quarter of 2012. Non-GAAP advertising revenue is expected in the range of $103.0 million to $105.0 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 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 Baidu Inc. (BIDU - Snapshot Report), Inc. (SOHU - Analyst Report), 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 over 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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