Sina’s Earnings Wednesday Could Show Lower Advertising Spend & Higher Costs

Sina (NASDAQ:SINA), primarily an online media company, will announce its Q2 2012 earnings this Wednesday, August 15. The company, which also offers mobile value-added services in China, operates online news and content through Sina.com, a Twitter-like microblog – Weibo.com, and Mobile Value Added Services (MVAS). Sina makes money primarily through its display advertising and mobile value added services. While last quarter, the company registered a 6% increase in its revenues, we believe that a slowdown in economic growth could impact the Chinese advertising business, which combined with rising operating costs could put a downward pressure on Sina’s Q2 revenues.

Check out our complete analysis of Sina

Slowdown In Display Advertising Revenue Growth

Sina derives over 70% of its revenues from display advertising on its online properties like Sina.com and Weibo.com. Though the display advertising revenues have shown a modest increase in the last few years, Sina’s market share has registered a significant decline as the overall display advertising market has expanded at a rapid pace. We expect Sina’s market share in 2011 to be around 7.7%, and forecast a marginal decline in the same throughout the forecast period.

The macroeconomic headwinds negatively impacted Sina’s display advertising revenue growth, that took a hit last quarter. The slowdown in the overall Chinese display ad market continued in the second quarter as well, which combined with Sina’s declining market share could further weigh down the ad revenues this quarter.

However, we believe that Sina’s focus on monetizing Weibo through socially powered brand advertising and social recommendations to drive e-commerce sales will contribute additional revenue in the coming quarters, and could compensate for any decline in its traditional display ad revenue.

Focus On Monetization Of Online Properties

Last quarter, Sina announced its plans to focus on the monetization of its online properties like its microblogging service – Weibo.com, and its gaming platform. It plans to monetize the Weibo microblogging service, which has around 350 million registered users, by launching new display advertising units. ^[1]

Sina has been trying to increase Weibo’s user base by introducing various initiatives. The recent launch of an Internet television service is one such move by the company, which by adding more multimedia content aims to increase its social networking users and retain existing ones in face of stiff competition from rivals such as Tencent Holdings Ltd. Additionally, Sina also launched a new platform called Weiba for hosting discussion forums, a move that is slated to invade search engine giant Baidu‘s (NASDAQ:BIDU) turf by posing a challenge to its popular Tieba discussion platforms. (Read: Sina’s Weiba Discussion Forums Step Up On Baidu’s Turf)

Earlier last month, Sina announced its intention to introduce an in-line advertising, better known as ‘sponsored tweets’ or ‘Weibo Tui Guang’. The service, which is similar to Twitter’s ‘Promoted Tweets’ service, is in the testing phase right now in collaboration with select brands such as BMW and Chinese travel agent Ctrip (NASDAQ:CTRP). (Read: Sina Follows Twitter And Launches Sponsored Ads)

On the flip side, Sina’s display ad revenues from Weibo.com could be negatively impacted by the recent ID requirements imposed by the Chinese government and the ban on the commenting feature on Weibo. Any signs of a drop in Weibo’s user base or user growth rate is something that we will be looking out for in the earnings call on Wednesday.

Operating Expenses

Sina’s operating expenses, specifically its sales & marketing and research expenses, were at an all-time high in 2011. Much of the increase can be linked to its growing investment in Weibo, which has led to the latter’s user base growing to around 350 million registered users. We expect Sina to clamp down on its operating expenses in 2012, but if it continues to keep spending at its current rate, the cost burden could weigh on its cash flows and impact its value significantly.

We have a current price estimate of $66.34 for Sina which is nearly 30% above its market price.

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1. Sina Microblog to Start Monetizing in Q2 2012, Marbridge [↩]