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Sina Corporation  (NASDAQ:SINA)
Q3 2018 Earnings Conference Call
Nov. 28, 2018, 7:10 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the SINA's earnings conference call for the Third Quarter of 2018 Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advice you that this conference is being recorded today, Wednesday, November 28, 2018.

I would now like to hand the conference over to your first speaker today, Ms. Sandra Zhang. Thank you, please go ahead.

Sandra Zhang -- Investor Relations Manager

Thanks, operator, and hello, everyone. Welcome to SINA's earnings conference call for the third quarter of 2018. Joining us today are our Chairman and CEO, Charles Chao; and our CFO, Bonnie Zhang. This call is also being broadcast on the Internet and is available through our IR website, at ir.sina.com.

Now, let me read you the Safe Harbor statement in connection with today's conference call. Our discussion today will contain forward-looking statements, which involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. SINA assumes no obligation to update the forward-looking statements in this call and elsewhere. For detailed discussions with these risks and uncertainties, please refer to our latest Annual Report on Form 20-F and other filings with the SEC.

In addition, I would like to remind you that our discussion today includes non-GAAP measures, which mainly exclude stock-based compensation and certain other items. We use non-GAAP measures to gain a better understanding of SINA's comparative operating results and future prospects. Please refer to our earnings release for more detailed information on reconciliation of GAAP to non-GAAP measures.

During the call, we may discuss non-GAAP measures for Weibo, which applied the same methodology we used to calculate non-GAAP measures at the SINA Group level. After management remark, we'll open the lines for a brief Q&A session.

With that, I would like to turn the call over to our CFO, Bonnie.

Bonnie Yi Zhang -- Chief Financial Officer

Thank you, Sandra. And thank you all for joining our conference call today. Let me walk you through the operational and financial highlights for the third quarter 2018. Before the detailed financial review, I would like to remind you that unless otherwise noted, my prepared remarks would have focused on non-GAAP results and all the comparisons are on a year-over-year basis. In addition, for easy comparison I may also indicate our revenue or expenses figures under the old accounting standard, which excludes barter transaction, adds back value-added tax to the related current period financials.

Let's start with an overview of our third quarter results. SINA's net revenue for the third quarter of 2018 was $554.6 million, up 26% or 29% on a constant currency basis. SINA's operating income grew 16% to $168.1 million. Net income attributable to SINA was $67.7 million and the diluted EPS was $0.93. SINA's online advertising revenue for the third quarter of 2018 grew 33% to $483.8 million, primarily driven by an increase of $132.5 million or 48% of growth in Weibo advertising and marketing revenues.

Let me provide some color on Weibo's platform growth. As a platform with mobile MAU, over half of the mobile Internet population in China, we will continue to deliver strong user growth and engagement, further solidifying the platform position as the leading social media in China. We attributed the robust growth of the platform to teams efforts in product revamp, channel investment and the content ecosystem cultivation, which further strengthened the social network effect and broadened our strategic mode to serve public and social interactions among Chinese and the global Chinese communities.

On top of user growth, Weibo demonstrated and reinforced the unique value proposition for advertisers through a full spectrum of social products -- commercial products, serving advertisers' comprehensive social marketing demands. In the third quarter, the increase in customer number and ARPA continued to be the drivers of ad revenue growth. From an industry perspective, we'll continue to see vitality in Weibo's top key accounts industry with FMCG and 3C growing at a triple-digit rate on an annual basis.

The SME sector also delivered healthy growth in Q3 under the recent regulatory changes in few vertical industries, such as gaming and Fintech. We expect these challenges will continue to weigh on the growth prospects of our marketing dollars in the above named industry segments in the foreseeable future.

Portal ad revenues were $74.5 million, down 15%, or 10% under the old accounting method, or down 12% on a constant currency basis. Excluding the accounting and unfavorable currency changes, portal business was pressured from ad budget cutback by SME customers, operating in sectors under tightened regulations, such as Fintech. Despite, the regulatory and micro uncertainties, we are pleased to see the resilient advertising performance of few branded industry of portal, such as auto. This was partially attributable to the healthy traffic growth across SINA's mobile media properties, particularly the SINA Finance App with the average DAU growing 214% on an annual basis. On the monetization front, mobile ad revenue continued to grow at a healthy rate, contributing approximately 79% of total portal ad, up from 63% last year.

Turning to non-advertising business. Non-ad revenues were $70.8 million, down 8%, or down 2% under the old accounting method. Excluding the accounting change and the negative currency translation impact, the decline was -- resulted from the lackluster Fintech business, due to the regulatory headwind, which was partially offset by the increase in Weibo value-added service.

Portal non-ad revenues were $24.1 million, 35% decrease on a year-over-year basis, mainly resulted from the downturn of payment business, because of the sweeping default wave of P2P companies, as we alluded in the prior conference calls. On the other hand, the micro loan facilitation business has returned to the growth trajectory even under the tough comps in Q3 2017, as we launched new Fintech products and upgraded our compliance standards according to the latest government regulation guidelines.

Turning to gross margin. Gross margin for the third quarter of 2018 was 80%, up from 76% last year. Advertising gross margin was 82%, up from 77%. The increase in advertising gross margin was mainly a result from our revenue reporting changes from gross basis to net basis under the new accounting standard adopted. Non-advertising gross margin for the third quarter of 2018 was 70%, flat year-over-year.

Now, moving on to operating expenses. In the third quarter, operating expenses totaled $276.4 million, up 46%, or 30% under the old accounting standard, year-over-year. Under the old net method, sales and marketing expenses took approximately 26% of SINA's net revenue, up 1% from last year, but dropped 2% sequentially. The slight rise of sales and marketing expenses as a percentage of revenue was driven by the increase of investment in China marketing on user acquisition of Weibo App, SINA News App and the SINA Finance App. In addition to the sales and marketing expenses, the increase in personnel-related cost was another factor that led to the increase in OpEx.

Operating income grew 16% to $168.1 million, representing an operating margin of 30%, down from 33% last year. Non-operating income under GAAP measure was $77.3 million compared to $11.1 million last year. Non-operating income in Q3 included a $50.1 million net gain on sale of investments, fair value changes and impairment on investments, which is excluded under non-GAAP measures, a $17.1 million net interest and other income and a $10.2 million net earnings from equity method investments, mainly resulted from earnings pick-up related to Company's investment in Tian Ge. Please refer to our earnings release for more detailed information about non-operating items for the same period last year.

Turning to tax. Under the GAAP measures, income tax expenses were $68.1 million, compared to $24.6 million last year, largely attributable to the deferred tax liability recognized from the fair value changes of certain investments. Net income attributable to SINA was $76.7 million (ph) or $0.93 dilutive net income per share.

Now, let me turn to the balance sheet and cash flow items. As of September 30, 2018, SINA's cash, cash equivalents and short-term investments totaled $2.5 billion compared to $3.4 billion as of December 31, 2017. The decrease of SINA's cash and short-term investments were primarily due to continued investment activities made in the first three quarters, including the payment of land use rights for our headquarter building in Beijing and the execution of share repurchase program in the amount of $228.9 million. For the third quarter 2018, net cash provided by operating activities was $100.8 million, capital expenditure totaled $46.8 million and the depreciation and amortization expenses amounted to $9.9 million.

Before wrapping up my prepared remarks, I would like to make a note on the Company's fiscal year 2018 revenue guidance. In view of the macroeconomic condition and the regulatory impact, we are revising our fiscal year 2018 revenue guidance to a range of RMB14 billion to RMB14.2 billion, or $2.09 billion to $2.12 billion, assuming US dollar and RMB exchange rate of RMB6.7. The revised revenue guidance represents a year-over-year growth rate of 32% to 34%, reflects a 5% to 7% adjustment to the midpoint of the original revenue guidance we provided at the beginning of 2018.

With that, operator, please open up the call.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Eddie Leung from Merrill Lynch. Your line is open.

Eddie Leung -- BofA Merrill Lynch -- Analyst

Good evening, Charles and Bonnie. Couple of questions. I guess the first one is a more high level. SINA has been in the Internet Industry for quite a while. So just wondering if you could share your thoughts and observations, because on the macro environment we are facing this time versus a couple of macro headwinds in the past, like 2009, as well as, for example, 2012, those times, any differences and similarities?

And then secondly, could you also give us an update on the SINA News App? For example, any update on the operating metrics as far as contributions to the portal advertising dollars, that will be great. Thanks.

Charles Chao -- Chairman and Chief Executive Officer

Okay. Eddie, I'll try to answer your first question. That's a tough one. I think actually it's a very good question. I mean over the last 20 years, we have been through several cycles, up and downs and the Internet bubbles and then Internet bubble burst, and then the new opportunities coming from gaming, for SP, and from e-Commerce and then we have mobile Internet. And so there are a few rounds of cycles we've been going through and some of these are impacted by the macroeconomic conditions, some of these are not.

But in terms of the impact of macro-economics, I mean -- I think in the past our experience has, if the macroeconomic condition impacted the entire economy, and the Internet industry may not be affected too much, primarily because the entire Internet market is growing, despite of the bad economic conditions on a macro basis and in terms of user growth, in terms of more adoption of different applications and in terms of more time spending on Internet. So when you have this kind of situation, the Internet industry is not so much affected by the macroeconomics. I mean, maybe certain industries like auto, like real estate, these type of vertical areas might be more affected, in terms of advertising dollars for a particular vertical industry. But overall, I think, there's not that much impact. And especially in the economic downturn and when the macroeconomic condition is not very good -- was not very good, people actually tend to turn to Internet for the improvement of efficiency of their own businesses and more effective marketing channels for their products.

So overall, I think, in the past, I think the macroeconomic conditions in the down cycle did not have too much impact on the Internet industry. But this time maybe a little bit different, partly because the entire Internet market, in terms of the user growth has kind of stabilized or stagnant a little bit, and in terms of time consuming consumption, Internet is also slowing down in terms of the time spent, I mean, on Internet grows. And so these factors, and not to mention that Internet is already in everybody's life, affecting every industry already.

So in that sense, I think, the macroeconomic condition will have more impact this time versus previous round and that's probably where we have seen, in some of the areas, I mean we have been experiencing right now in both SINA portal and Weibo, and especially in some of the areas like travel, for example, like some of that auto service industries and the big-ticket items, like wedding-related expenditures, we have seen some slowing down. That has to do with more macroeconomic conditions. And indirectly, we believe that the conditions also impact the investment in the entire Internet industry as a whole and you have seen significant decline in terms of investments in that particular sector. That actually also indirectly impacts the demand for advertising for lot of the other companies, small companies, trying to driving traffic for their new applications, new Internet services. And this kind of demand also coming down, and so that will have impact indirectly our industry. So this is kind of -- sort of our take in terms of the impact of macroeconomic conditions on our industry as a whole, I mean, for this particular cycle, I guess.

And regarding the second question, the News App, I think the News App is an area that our overall marketplace is relatively mature in terms of overall market growth and also in terms of time spent. So people are actually more competing on the time spent on this particular app versus another one, and so the overall growth rate for every app in this sector is quite -- slowing down quite a bit. And for us, we're still growing, but on a much smaller basis in the second half of this year versus -- I'm comparing to the previous first half, or comparing the previous year. But in terms of efficiency, monetization is still growing, but on an overall basis, I mean, given that the trough is not growing that much and given that the demand for advertising is much for SME, I mean is kind of challenging, not only for Weibo, but also for the -- our Internet mobile business. And so we're still going to have some challenges in near future in terms of growing our revenues for SINA mobile, especially for SMEs. Hope I answered your question.

Eddie Leung -- BofA Merrill Lynch -- Analyst

Thank you.

Charles Chao -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Alicia Yap from Citigroup. Please ask your question.

Alicia Yap -- Citigroup -- Analyst

Hi, good evening, Charles and Bonnie. Thanks for taking my questions. I have follow-up questions on the Weibo comment earlier. I think (inaudible) mentioned about the internal investment into the MCN for some of the subsidies, even its -- the slowing macro and the subsidies is also affecting the slower guidance growth. So just wanted to know, roughly, how much of these initiatives, in terms of reinvestment into the MCN is affecting our 4Q guidance slowdown. And then is this actually in line or related to Alibaba strategy, which is also pushing off the monetizations of the recommended feeds, or is it separate feed?

And then quickly on the housekeeping questions is that, does the revisions of SINA and also Weibo guidance include any of the (inaudible) contribution in the fourth quarter?

Charles Chao -- Chairman and Chief Executive Officer

Okay, Alicia, let me try to answer your first question. I think these are two separate issues, in terms of internal investment in our KOL and MCNs. I think this is really to try to build a stronger content ecosystem for our Weibo platform, basically. With more KOLs and more MCNs, we are going to see more content being contributed by the big KOLs and also more interactions between our KOLs and our user base. And this has always been our strategy, I mean, for the last whatever years and try to build a strong ecosystem for our KOLs. And our subsidiary really tried to encourage people to actually create more content and that helped then to build bigger social assets on our Weibo platform, so that they can benefit from their strong social assets going forward.

And also indirectly, I mean, when these people are building a strong social asset and they have more incentive actually to spend marketing dollars on us, actually, I mean to -- these were the organic drivers for our advertising revenues for our ecosystem. And -- but this has nothing to do really -- I mean, it's more from our perspective to create a stronger content ecosystem, not really directly to our revenue guidance for the first (ph) quarter. And for the first (ph) quarter, I think (inaudible) has already kind of elaborated some of the market conditions, as well as some of the challenges we are facing in the market. Some of these are regulatory related, some of these are macroeconomics related and some of these are competition related and some of these could be our internal related.

And there are multiple factors. I mean some of these from demand side, some re from the price side, and that's a mixed picture. Overall, I think it's KA, which seem to be doing very well and has very meaningful strong growth. And SME is a little bit challenging and we can elaborate some of the factors affecting SME. Some of these could be near term, I mean like the regulatory issues related to gaming and these type of things (ph). And some of this could be a little bit longer in terms of the demand side and -- like the travel business, like wedding businesses.

But some of supply side issue could be more complicated, because we're having a much competitive market in terms of supplying these kinds of inventories for the mobile advertising. And so, this coupled with the demand side problems, we are facing some of the challenges in SME areas in near future. But overall, I think, that's probably an overall picture. And I think our Company has already elaborated this very well in the previous conference call. And in terms of revision of the guidance, maybe Bonnie can give you some color on that.

Bonnie Yi Zhang -- Chief Financial Officer

For the fourth quarter guidance, we have included our best estimates of the EVE (ph) live broadcasting revenue contribution into the number. So again, it's very preliminary, as we just acquired the team and we are still in the midst of the product conversion period.

Alicia Yap -- Citigroup -- Analyst

Okay, thank you, Bonnie. Thank you, Charles.

Charles Chao -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Karen Chan from Jefferies. Please ask your questions.

Karen Chan -- Jefferies -- Analyst

Thank you, Charles. Thank you. Bonnie, and thank you, Sandra. I have two questions here. First, within our top 5K verticals, including auto, FMCG or finance, which are seeing the most macro impact and particularly for auto OEMs, are we seeing any indication to a pullback in ad spending as these advertisers plan for their 2019 ad budget?

Secondly, maybe more a question for Charles. Given the many changes we've seen in the regulatory environment recently, be it mobile games, eCommerce, video, et cetera, just want to get your thoughts on how is this level of participation from regulatory bodies different from the last in any way, and will any of these Internet segments -- or what kind of platforms do you think will show higher resilience when the dust settles? Thank you very much.

Charles Chao -- Chairman and Chief Executive Officer

In terms of the verticals, and historically our top verticals like automobiles, like financials, like FMCG, these are our three top ones and there are smaller ones like eCommerce and maybe the IT products -- yeah, IT products, that's like -- IT products, actually including the mobile phones. And I think the -- currently I think we are seeing, as Godfrey (ph) mentioned in the previous call, some of big-ticket items affecting some of their spending, especially for performance-related advertisement. But in terms of the brand advertising, we are not seeing that much impact so far. And -- for example, for automotive industry, we know that auto sales is going down in the second half of the year on a yearly basis for China market. But we're not seeing that much impact on advertising yet. Obviously, it's not great, but maybe it experienced -- the theory is that when the market is not doing well, the automobile manufacturers actually have more incentive to spend money to push their sales. And in some way they offset some of the impact of the decline in sales for the mobile industry and that some of the market we are observing.

In terms of the FMCG, I think it's not that much related to the macro yet, and we're not seeing too much impact from the spending from customers for these kind of industries. And same for IT. So overall, I think, we're not seeing that much impact at the current stage, but the real impact is really for the SME and also for the -- I will say the big customers -- some of the big customers for performance-based advertising, they've actually scaled back quite a bit in certain industries, as we mentioned like travel, like wedding-related, like Fintech, these kind of areas.

And in terms of the other question you have, on an overall basis, in terms of regulatory environment, in terms of macro environment, which industry less affected, that's a tough question and I think it's a complicated one, because if we got to pin down a particular industry or particular application, than the one more resilient, on an overall basis if we look at the Internet industry as a whole, although you have a very different product format for different companies, at end of the day most of the companies generate their revenue from advertising. I mean you're right. And some of these are more related to performance-based advertising for Internet service, like a gaming advertising, like eCommerce advertising, like download our apps, these type of things. And some of these relate to the -- I will say, the brand advertising.

And then you have another category not (ph) generated revenue from advertising, mainly the content fee-based services, like gaming, like long video these type of things. And these are the major -- sorry the business models, or revenue models for majority of Internet companies. And so if you look at these models, you can easily identify some of these areas, if they're relying on certain revenues and then certain regulatory change and the macroeconomic change will have a great impact on these particular companies who will have particular models, but on an overall basis I think each company will be affected by a slowing down in the advertising business and which -- including the KA business, brand advertising business and the performance-based SME business.

And in terms of KA, I mean, as I've said, at the current stage we're not seeing that much impact right now, but maybe it's due to the strength of our platform in terms of delivering service better for our key customers via other platforms. And as you know, we have a pretty robust platform for both Weibo social media and for the News App to provide overall service for advertising customers, for KA customers. But over longer term if macroeconomic continues, if the condition lasts, and I think overall it will eventually hit KA customer base and have impact on the KA advertising. But I think at the current stage, we are seeing actually more challenging environment in the performance-based advertising for SMEs, as I elaborated in the previous question that a lot of these has demand issues and then also we are facing some supply issues, that actually is common for every player in this market.

And in the demand side we have a regular impact on the gaming and Fintech, where you have the macroeconomic impact on investment related to travel and these type of industries. And so, these were inventories, I think, hit the market and if you look at the companies who rely much on the performance-based advertising, I think these companies will be more affected on an overall basis. That will be my assessment. Hope that answers your question.

Karen Chan -- Jefferies -- Analyst

Thank you very much. Thank you, Charles. Very helpful.

Charles Chao -- Chairman and Chief Executive Officer

Thank you.

Operator

There are no further questions at this time. I would now like to hand the conference back to today's presenter, Ms. Sandra Zhang, please continue.

Sandra Zhang -- Investor Relations Manager

This concludes our conference call today. Thank you all for joining us. We'll see you next quarter.

Operator

Ladies and gentlemen, this does conclude our conference for today. Thank you for participating. You may all disconnect.

Duration: 33 minutes

Call participants:

Sandra Zhang -- Investor Relations Manager

Bonnie Yi Zhang -- Chief Financial Officer

Eddie Leung -- BofA Merrill Lynch -- Analyst

Charles Chao -- Chairman and Chief Executive Officer

Alicia Yap -- Citigroup -- Analyst

Karen Chan -- Jefferies -- Analyst

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