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China's leading video website operator is growing and its losses are narrowing, but that may not be enough.
Youku Tudou (UNKNOWN: YOKU.DL ) opened sharply lower this morning after capping off a strong quarter with lukewarm guidance for the current period.
Things have been clicking since Youku completed its acquisition of smaller rival Tudou this summer. Revenue in the fourth quarter clocked in at a better-than-expected $102.1 million, or 30% more than what the two companies combined for a year earlier. Youku Tudou still has some more synergies to squeeze out of the deal but its quarterly deficit shrank to $0.11 a share.
Analysts were expecting red ink of roughly $0.15 a share on less than $100 million in revenue.
However, then Youku Tudou had the gall to publicly look ahead. The former dot-com darling is targeting $77 million to $83 million in revenue for this year's freshman quarter, and that's well off the $88 million that Wall Street was modeling.
Sequential slides are normal, and this is a seasonal thing. Youku itself saw its revenue decline 13% between the fourth quarter and the first quarter a year earlier. At the midpoint we're looking at a heartier 22% sequential drop this year, but Youku Tudou isn't alone. The late arrival of the Chinese New Year this year has left most of the country's leading Internet companies warning of substantial sequential dips.
SINA's (NASDAQ: SINA ) guidance calls for a 13% sequential downtick in revenue this quarter, and that's given its recent moves to begin monetizing its red-hot SINA Weibo micro-blogging platform. Even the typically resilient Baidu (NASDAQ: BIDU ) will be falling short. China's top search engine is targeting a 4% to 7% sequential dip on the top line this quarter.
The problem for Youku Tudou is that the revenue drop is more pronounced, and that's with every incentive to finally begin monetizing mobile usage this year.
There's no denying that the merger of Youku and Tudou is a good thing. The combined sites now command roughly a third of China's video streaming market. Cost savings will be realized. However, streaming video isn't an easy gig, especially in China where the more magnetic content is commercially licensed.
Youku Tudou spent 26% of last quarter's revenue on bandwidth costs in serving up the chunky video files and another 43% on content costs. We're talking about a model where the gross margins are already leaner than the chunky net margins that investors find in Baidu and online gaming giant NetEase.com.
Youku Tudou's margins will improve in time, but this will never be one of China's most profitable companies in terms of margins. Bandwidth costs may fall and marketers may be willing to spend more to reach viewers, but investors need to be realistic.
Youku Tudou is the star player of a growing online niche, but there's more to worry about than just this sharp sequential slip.
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