SINA Beats Q1 Earnings, Shares Fall on Weak Outlook - Analyst Blog

Shares of SINA Corp. SINA hit a 52-week low of $43.00, after the company provided a weak revenue outlook, primarily related to Weibo. The stock plunged 10.1% ($4.84) to close at $43.02 on May 22, 2014.

SINA reported first-quarter 2014 earnings of 6 cents per share, which beat the Zacks Consensus Estimate by a couple of cents. Earnings were also much better than a loss of 6 cents per share reported in the year-ago quarter.

Earnings per share include stock-based compensation ($6.9 million) but exclude net one-time items ($37.4 million) in the first quarter.

Quarter Details

Revenues increased 36.1% year over year to $171.5 million and were slightly higher than management's guided range of $162.0 to $167.0 million. Revenues beat the Zacks Consensus Estimate of $170.0 million.

However, adjusting for deferred revenues ($4.1 million) mostly related to the license agreements resulting from the E-House/CRIC transaction, revenues were $167.3 million up 38.0% from the year-ago quarter.

Advertising revenues moved up 43.9% from the year-ago quarter to $135.7 million. Advertising revenues were almost in line with the higher end of management's guided range of $133.0–$136.0 million. Non-advertising revenues increased 17.1% year over year to $31.6 million in the quarter, ahead of management's guided range of $29.0–$31.0 million.

Weibo revenues jumped 160.8% year over year to $67.5 million. This was driven by new revenue streams from promoted feeds for small and medium sized enterprises as well as Alibaba's e-Commerce revenues. Portal revenues climbed 3.9% year over year to $104.0 million.

Gross margin increased to 59.0% from 49.4% in the year-ago quarter. This increase was mainly due to higher revenue base and a significant jump in advertising and non-advertising gross margin. The increase was primarily due to favorable product mix of higher margin Weibo advertising and value-added-services.

Operating expenses as percentage of revenues jumped 460 basis points (bps) to 66.0%. The sharp rise was mainly driven by higher selling & marketing expenses and product development costs, which increased by 510 bps and 120 bps, respectively, year over year. This was partially offset by a 90 bps decline in general & administrative expenses.

However, the massive jump in operating expenses negatively impacted profitability. The company reported operating loss (including stock-based compensation but excluding one-time items) of $11.7 million, slightly better than a loss of $14.5 million in the year-ago quarter.

SINA reported GAAP net loss of $33.2 million or 52 cents per share compared with loss of $13.2 million or 20 cents per share. Including stock-based compensation but excluding one-time items, net income was $4.2 million or 6 cents compared with a loss of $3.7 million or 6 cents per share.

Excluding stock-based and one-time items, SINA reported net income of $11.1 million or 15 cents per share compared with $1.5 million or 2 cents per share.

SINA exited the first quarter with cash, cash equivalents and short-term investments of $1.81 billion compared with $1.87 billion at the end of the fourth quarter. Cash provided by operating activities in the first quarter was $4.9 million. During the quarter, SINA's board approved a share buyback program worth $500.0 million.

License Cancellation Details

On Apr 25, 2014, SINA announced that the Chinese regulatory authorities have decided to withdraw two licenses related to Internet Publication and Online transmission of Audio-Visual programs.

The withdrawal follows a crackdown on pornographic content by the Chinese authorities. Reportedly, the regulatory authorities found pornographic content on SINA's online reading channel and website. Beijing Municipal Cultural Market Administrative Law Enforcement Unit has also proposed to levy fines on SINA for the violation.

Weibo Initial Public Offering IPO

In April, Weibo started trading at Nasdaq. As compared to its original expectation of $500.0 million, Weibo finally raised $286.0 million in the IPO, primarily due to low demand for Chinese Internet stocks. SINA holds a 54.0% stake in Weibo, with Chinese e-Commerce giant Alibaba being the second largest partner with 30.0% holding on a fully diluted basis.

Outlook

SINA expects revenues for the second quarter of 2014 to be in the range of $177.0 to $182.0 million while the Zacks Consensus Estimate is pegged at $183.0 million. Advertising revenues are expected in the range of $152.0–$155.0 million, while non-advertising revenues are projected in the range of $25.0–$27.0 million.

Management believes that increasing investment by Weibo on product development and marketing will hurt its as well as SINA's operating results in 2014. SINA expects to invest further on its own portal (mobile and video) that will also keep margins under pressure.

Our Take

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, the recent licensing issue with the Chinese government is a major headwind, which will negatively impact brand revenues in the near term. Although the investments on mobile and video are long-term positives, they will hurt profitability for the rest of 2014.

Moreover, Weibo is expected to face stiff competition from the likes of WeChat in China, which will hurt user base. We believe that Weibo's monetization ability will be a major driving factor for SINA amid increasing competition from the likes of Sohu.com Inc. SOHU, NetEase NTES and Youku Tudou YOKU in the video and brand advertising market.

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

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