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SINA Corp (SINA - Analyst Report) reported non-GAAP fourth-quarter 2012 earnings of 13 cents per share, down from 21 cents per share reported in the year-ago quarter. Including stock-based compensation, earnings came in at 5 cents per share, much better than the Zacks Consensus Estimate of a loss of 2 cents per share.

Revenues

Total revenue (excluding deferred revenue) jumped 4.4% year over year to $134.4 million in the reported quarter and in line with management’s guided range of $132.0 million to $136.0 million. However, revenues fell shy of the Zacks Consensus Estimate of $143.0 million.

The year-over-year growth in total revenue was primarily driven by higher advertising revenue in the quarter, up 6.7% year over year to $110.7 million, and was slightly ahead of the low end of management’s guided range of $110.0 million to $112.0 million. Weibo display advertising contributed 19.0% or $21.3 million of total advertising revenues. Moreover, advertising from telecommunications, IT services and FMCG sector further contributed to the growth in advertising revenues.

Non-advertising revenue decreased 4.8% year over year to $23.8 million in the quarter, slightly ahead of the mid-point of management’s guided range of $22.0 million to $24.0 million. Mobile-value-added-services (MVAS) revenues were $13.2 million, down 38.0% from the year-ago quarter. However, Weibo value-added services helped the rest of the non-advertising revenues to increase by a staggering 181.0% from the year-ago quarter to $10.6 million.

Operating Results

Gross profit on a non-GAAP basis increased 9.3% year over year to $75.4 million in the quarter. Gross margin expanded 250 basis points (“bps”) from the year-ago quarter to 56.1% due to higher revenue base and prudent product mix. Including stock-based compensation, gross profit came in at $74.7 million.

Operating profit on a non-GAAP basis came in at $6.4 million in the quarter compared with a profit of $6.7 million in the year-ago quarter. The year-over-year decline was primarily due to higher operating expenses, which increased 10.6% from the year-ago period, owing to higher personnel-related expenses, lease expenses and infrastructure costs. Including stock-based compensation of $5.5 million, income from operations came in at $0.9 million.

Net income on a non-GAAP basis was $8.9 million compared with $13.9 million in the year-ago quarter. Including stock-based compensation, earnings came in at $3.5 million.

Balance Sheet

SINA exited the fourth quarter with cash, cash equivalents and short-term investments of $713.6 million compared with $696.2 million at the end of the third quarter. Cash flow from operating activities in the quarter was $33.5 million.

Outlook

SINA expects non-GAAP net revenue to be between $115.0 million and $119.0 million for the first quarter of 2013. Advertising revenues are expected in the range of $94.0 million to $96.0 million, while non-GAAP non-advertising revenues are projected in the range of $21.0 million to $23.0 million.

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. Moreover, the company expects to strengthen its Weibo value-added services on the back of continued growth in the mobile internet in China.

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. Moreover, the company provided a tepid outlook for the first quarter.

We believe that increasing competition from Sohu.com Inc. (SOHU - Analyst Report), Yahoo (YHOO - Analyst Report), NetEase (NTES - Snapshot 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.

Currently, SINA has a Zacks Rank #3 (Hold).

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