SINA Beats EPS, Misses Revenue

SINA Corp. ( SINA - Analyst Report ) reported third quarter earnings of 7 cents, which beat the Zacks Consensus Estimate by a couple of cents. However, reported revenue was short of the consensus mark.

Quarter Details

Total revenue (excluding deferred revenue) jumped 17.6% year over year to $147.7 million in the reported quarter and was toward the higher end of management’s guided range of $145.0 million to $148.0 million.

The year-over-year growth in total revenue was primarily driven by higher advertising revenue in the quarter, up 19.4% year over year to $120.6 million, and marginally ahead of the low end of management’s guidance range of $120.0 million to $122.0 million.

Non-advertising revenue increased 10.3% year over year to $27.1 million in the quarter. This was slightly ahead of the company’s guided range of $25.0 million to $26.0 million. Mobile-value-added-services (MVAS) revenue was $19.1 million, slightly down from $21.4 million in the year-ago quarter.

Gross profit on a non-GAAP basis surged 14.3% year over year to $78.3 million in the quarter. Gross margin declined 150 basis points (“bps”) from the year-ago quarter to 53.4%.

Advertising gross margin declined to 55.2% from 59.3% 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 850 bps to 43.1% in the reported quarter. MVAS gross margin expanded 400 bps on a year-over-year basis to 36.0%, attributable to favorable product mix.

Operating loss, excluding one-time items and charges, came in at $5.6 million in the quarter compared to a profit of $68.8 million in the prior-year quarter. The year-over-year decline was primarily due to higher operating expenses, which increased 23.8% from the year-ago period, owing to higher personnel-related expenses and infrastructure costs related to Weibo.com.

Interest and other income decreased 24.7% year over year to $4.4 million in the reported quarter.

Net income on a non-GAAP basis was $4.7 million compared with $11.4 million in the year-ago quarter. Our non-GAAP earnings figure for the third quarter excludes amortization of intangible assets; deferred revenue related to CRIC transaction, share of equity investments and gain on sale of (impairment) on equity investments but includes stock-based compensation expenses.

Our non-GAAP calculations may differ from management’s presentation due to the inclusion/exclusion of some items that were not considered by management.

On a fully diluted GAAP basis, the company reported net income of $9.9 million (14 cents per share) compared with loss of $336.3 million ($5.10 loss per share) in the comparable prior-year quarter.

SINA exited the third quarter with cash, cash equivalents and short-term investments of $696.2 million compared with $716.3 million at the end of the second quarter. Cash flow from operating activities in the quarter was $17.7 million.

Guidance

SINA expects non-GAAP net revenue to be between $132.0 million and $136.0 million for the fourth quarter of 2012. Advertising revenue is expected in the range of $110.0 million to $112.0 million (up 6% to 8% year over year), while non-GAAP non-advertising revenue is projected in the range of $22.0 million to $24.0 million (down 4% to 12% year over year).

Our Recommendation

We believe that SINA remains a premier company based on its strong product pipeline, continuous investments 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 - 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 for the stock going forward.

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