Down in Kentucky, the Derby is over. But up on Wall Street, every day is a quest for the Triple Crown. You see, it takes three things to make a perfect earnings report:
- Beating revenue expectations.
- Beating profits expectations.
- Promising more of the same next quarter.
Yesterday, Chinese Internet portal and wireless service provider TOM Online (Nasdaq: TOMO) beat the Street's estimates for sales (good), matched estimates for profits (nice, but no trophy), and promised only $50 million to $51.5 million in sales next quarter, when Wall Street wanted to hear "$52.6 million." (Thanks for playing. Please leave $73.4 million in market cap on your way out the door.)
But while TOM failed to wow the Street, the company turned in a superb quarter by any objective measure. Two days ago, I described how TOM had been sacrificing gross margins to gain market share. Yesterday, the company advised that it was both having and eating its cake. TOM "continued to develop its alliances with media partners in TV, radio, and print." Meanwhile, it grew its gross margin 170 basis points year over year, to 39.4%. Although the company didn't come out and say this, I suspect that part of the reason TOM was able to grow its gross was the more rapid growth of its high-margin online advertising business (up 70% year over year) compared with its lower-margin wireless Internet services division (up 36%.) That's no surprise. After all, China's the world's fastest-growing advertising market, and local competitors like Sina (Nasdaq: SINA) are also reporting astounding growth in their advertising divisions.
As for the quality of those revenues and the earnings they create, they're simply and consistently superb. One year ago, net earnings under U.S. Generally accepted accounting principles (GAAP) came in at $9.2 million. Cash profits, also known as free cash flow, were even stronger, at $9.3 million. This quarter, GAAP net earnings of $12.1 million were more than backed up by free cash flow of $12.6 million.
Stock dilution? Not here.
All too often, when you encounter a fast-growing company in the U.S., you'll find that high growth brings copious amounts of stock dilution for outside shareholders. For whatever reason, this phenomenon occurs less frequently abroad. At TOM, for example, the share count grew only 2.2% year over year.
Put it all together, and here's my Take: Wall Street may be ready to consign TOM to the glue factory, but I say TOM's still got room to run in the long term. Now that you know how TOM Online did this week, check out competitor Baidu.com (Nasdaq: BIDU) in Rick Munarriz's Baidu: Buy, Dude!
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Fool contributor
Rich Smith
does not own shares of either company named above.
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