Sina’s Third Quarter Results Bear Out Management’s Guidance

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Chinese Internet company Sina Corp (NYSE: SINA) announced its third quarter results for 2014 on November 13. Revenue for the quarter came in at ~$198 million. This was within the guidance provided by the management and $2 million more than the Bloomberg Businessweek analysts consensus estimate. In our pre-earnings article, we had written about our optimism on the revenue potential for Sina’s micro-blogging Weibo’s for the quarter. We had also written about the likely increase in investments in other businesses by Sina to seek diversification from Weibo (See Sina Q3 Earnings Preview).

We have a $48 value estimate for Sina compared to a $40 market price for the stock. We have projected revenues of  $774 million for Sina in 2014, which compares to a Bloomberg Businessweek analysts consensus of $771 million.

See our complete analysis of Sina here

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Strong Growth Of Weibo

Weibo is a micro-blogging and social networking website that enables users to follow celebrities and share user-generated content. Its revenues grew 58% year on year to ~$84 million, on the back of a strong growth in user base and adoption of new advertising programs by advertising customers. User base grew 36% year on year based on the number of monthly active users in September. Promote fee advertising products, that let online merchants create advertisements for products they sell online and pay per click, gained traction among both large and small advertising customers. Revenues from this product increased 438% year on year to reach ~$23 million. [1]

Sina hasn’t always had such strong performance on the user base front. The company, sometimes called the Twitter of China, has become synonymous with micro-blogging in China, and had a 30% of the market share in 2012. However, in 2013, its user base declined by 9%, following the shift of micro-bloggers to the mobile platform. Rival Tencent, garnered 37% of users lost by Weibo through its mobile chat app WeChat. [2] In our weekly report on Chinese Internet we have written on how Sina’s position in the micro-blogging space improved recently after another rival Netease announced the closure of its micro-blogging website (See our Weekly Chinese Internet Notes).

Advertisement revenue growth has also seen some disappointments, despite the remarkably good performance of the promote fee product. Large brand advertisers in the FMCG and automobile space reduced their spending on advertisements on micro-blogging as they sought to rein in advertising budgets. There was also some migration of such customers to other platforms such as online video. The combined effect of these factors saw Sina lose 18% of its revenues from the automobile industry and 20% of its revenues from the FMCG industry advertising customers. [1]

Shift To Mobile And Verticalization To Continue Apace

One of the important threats to Sina’s business model has been its over-dependence on its computer based micro-blogging service, i.e., Weibo. To address this threat, they have been investing in other verticals such as online lottery and internet finance. We had written on how this could dampen the operating income despite revenue gains made by Weibo. In its Q3 conference call, Sina’s management announced that operating revenues could be volatile for some quarters to come as a result of continued investments in verticals where monetization may happen only with a significant delay. [1]

As we have written in our pre-earnings report, the talk of Sina entering the internet financial services space has been around since late 2013. In Q2 2014, it finally launched a portal called micro-fortune, which according to Sina Corp’s CFO, “is a web-based platform for selling high quality financial assets directly to individual investors supported by SINA Payment”. [3] During the Q3 earnings release conference call, Sina’s management suggested that they would invest in this platform to facilitate the offering of a greater variety of wealth management products. [1]

We had earlier written on the Sina’s acquisition of online lottery website Aicai.com. During the soccer world cup, there was a large increase in sports related lottery sales through this channel. We had reported on how the Chinese online lottery industry is expected to grow by 70% this year from 42 billion Yuan ($6.7 billion) in 2013 due to the FIFA World Cup (See Sina Acquires Aicai.com). During the conference call after the earnings release, the company’s management said that they would be investing in setting up a specialized team to engage in product development in this vertical. It was also suggested that in the long term they may seek to exit their investment in this vertical for an equity investment gain. [1]

Expenses Register An Increase

Operating expenses increased 40% year on year in Q3 2014 to reach $127.1 million. The major factors that lead to this increase were identified by the management as higher personnel costs, marketing expenditure, and bad debt allowances. Businesses other than Weibo incurred costs of $60 million this quarter, up 28% on a year on year basis. This was on account of two factors. The first was higher labor related costs due to headcount and salary increases in product development and marketing. Secondly, bad debt expenses and depreciation allowances added to the rising costs. The management has warned us to expect further spending on recruiting talent and developing products that could reduce the operating income in future quarters. [1]

As for Q4, management has given a guidance of non-GAAP net revenues between $204 million and $210 million. Reuters on the other hand has a consensus estimate of roughly $215 million for the same, with an EPS forecast of $0.24 per share. [4]

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Notes:
  1. Sina Q3 2014 Earnings Call Transcript [] [] [] [] [] []
  2. Sina Weibo Took A Hit In 2013 []
  3. Sina Acquired License For Fund Sales []
  4. Sina Financials Page At Reuters []