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Sina Corporation (NASDAQ:SINA)
Q2 2019 Earnings Call
Aug 19, 2019, 8:10 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 SINA's Earnings Call for Second Quarter 2019. [Operator Instructions] I must advise you that this conference is being recorded today, Monday 19th of August, 2019. Now, I'd like to hand the conference over to your speaker host today, Ms. Sandra Zhang. Thank you, please go ahead.

Sandra Zhang -- Investor Relations

Thanks, operator, and hello, everyone. Welcome to SINA's earnings conference call for the second quarter 2019. Joining us today are our Chairman and CEO, Charles Chao; and our CFO, Bonnie Zhang. This call is also being broadcast on 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 statement in this call and elsewhere. For detailed discussion of 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 include 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 apply the same methodologies we use to calculate non-GAAP measures at the SINA group level.

After management remarks, we will open the lines for 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 the financial highlights for the second quarter 2019. Before the detailed financial review, I would like to remind you that, my prepared remarks would focus on non-GAAP results, and all the comparisons are on a year-over-year basis unless otherwise noted.

Let's start with an overview of the second quarter 2019 result. SINA's net revenues for the second quarter were $530.4 million, a decrease of 1% or increase of 5% on constant currency basis. Operating income was $152.8 million, a decrease of 4% or an increase of 2% on a constant currency basis.

Net income attributable to SINA was $54 million and the diluted EPS was $0.76. Now, let's turn to key financial items. SINA's online advertising revenue for the second quarter were $433.6 million, a decrease of 5% or an increase of 1% on a constant currency basis, primarily due to a decline in portal advertising revenue and a negative currency translation impact. Let me start from Weibo's business. Weibo's user growth reaccelerated meaningfully compared with Q1 with MAU adding approximately 21 million user quarter-over-quarter reached 486 million in June and the average DAU adding approximately 80 million [Phonetic] users to 211 million. On top of the solid user growth. We are encouraged to see strong performance of the user engagement as well with daily key [Phonetic] refreshment of video views booking double digit growth on both annual and a sequential basis. Leveraging our cluster of breaking news and social events initially released on Weibo during the quarter. The strong user performance also pointed to the traction of our revamped user product, which empowers our community to more easily discover and consume relevant trends and topics and engage in public conversations of their interest.

Our ongoing order improvements will continue to manifest itself in delivering organic user growth and a further deepening user engagement, positioning us well to better capture wallet share of digital ad budget when the overall market becomes less demand constrained. On monetization, Weibo's online advertising revenue for the second quarter was $370.7 million flat or up 6% on a constant currency basis. Weibo's key accounts business grew 12% or 19% on a constant currency basis. The FMCG sector continued to drive their growth, demonstrating resilience amid macro uncertainties in its advanced products in employing Weibo's differentiated social marketing products to compound the campaign effect from product launch to brand loyalty and ultimately self conversion.

The entertainment sector surprised on the upside and delivered the solid performance, despite the industry headwind, leveraging Weibo's unique strengths in viral distribution and a KAL IP [Phonetic] marketing around these blockbuster shows. Weibo SME sector was down 6% or flat on a constant currency base in the second quarter, since the unfavorable supply and demand dynamic persisted. We executed well in our initiative to tap into undermonetized industries and develop new clients, optimize sales channel and drive better ROI for existing customers, which exhibited positive trajectory for the SME sector in this quarter. However, the growth of these new initiatives was offset by the ad budget cutback from certain O2O categories -- categories and online gaming sector. We expect these efforts will take multiple quarters to compound meaningful impact on the top line.

Turning to portal, portal ad revenue for the second quarter were $63 million, a decrease of 25% or 21% on a constant currency basis, resulted from the ad budget cutbacks from SME customers. Turning to non-advertising business. SINA's non-ad revenue for the second quarter were $96.8 million up 20% or 28% on constant currency basis. The increase was mainly derived from the incremental revenue from SINA's fin-tech business and Weibo's live streaming platform. Portal non-ad revenue for the second quarter were $41.1 million up 47% or 56% on a constant currency basis. The increase of portal non-advertising revenue was driven by the strong performance of our micro-loan facilitation business underpinned by robust growth in the loan origination volume delivered as teams continue to optimize product mix, diversify funding source and enhance operating efficiencies.

Turning to gross margin. Gross margin for the second quarter was 77% compared to 81% last year. Advertising gross margin was 81% compared to 83% last year. Non-advertising gross margin for the second quarter was 60%, down from 68% last year due to the relative lower gross margin of the acquired live streaming business of Weibo.

Now moving on to operating expenses. In the second quarter. Operating expenses totaled $256 million, down 6%. Sales and marketing expenses decreased 20% year-over-year and took approximately 27% of SINA's net revenue, which was down 6% points from last year, largely attributable to disciplined channel marketing approach and a cost efficiency achieved in marketing campaigns.

Operating income decreased 4% to $152.8 million, representing an operating margin of 29% compared to 30% last year. Under GAAP measure, non-operating income for the second quarter was $19.7 million compared to an income of $1.2 million last year. Non-operating income for the second quarter, mainly including a -- $15.7 million net interest and other income and a $4.3 million net earnings from equity method investment, which is reported on -- quarter in arrears. Please refer to our earnings release for more detailed information about non-operating items for the same period last year.

Turning to tax. Under GAAP measure, income tax expenses were $46.7 million in the second quarter, compared to $27.9 million last year, a result from the deferred tax charges recognized from the fair value changes of our investments. Net income attributable to SINA in the second quarter was $54 million or $0.76 dilutive net income per share.

Now, let me turn to the balance sheet and cash flow items. As of June 30, 2019, SINA's cash, cash equivalents and short term investments totaled $2 billion compared to $2.3 billion as of December 31, 2018 mainly resulted from continued investment activities.

For the second quarter, net cash provided by operating activities was $128.6 million, capital expenditures totaled $5 million and a depreciation and amortization expenses amounted to $11.6 million. With that operator, please open up the call for questions.

Questions and Answers:

Operator

Thank you, ladies and gentlemen. We will now begin the question and answer session. [Operator Instructions] Your first question comes from the line of Alicia Yap, from Citigroup. Please go ahead.

Alicia Yap -- Citigroup -- Analyst

Hi, good evening, Charles, Bonnie and Sandra. Thanks for taking my questions. I have a question related to your fin-tech business. It looks like SINA's fin-tech business continues to hold up relatively well, especially the last two quarters. Could management share with us, how do you define SINA positioning in the business? And what type of medium and longer term target initiative that SINA hopes to achieve in the overall fin-tech business? Thank you.

Charles Chao -- Chief Executive Officer

Hi Alicia, this is Charles. Regarding the fin-tech business, and we have talked about that for many quarters and we always believe that the vertical areas are the areas that we can expand our business for portal, the SINA existing business. And so fin-tech is the area that we see a lot of potential, as well as always believe this is the area which have lot of potential to grow.

And we continue to believe that the companies especially big Internet platform with the data, with the user traffic has the advantage in developing this business. So we have been doing this for few years now and I think, would continue to be investing in this area. And the numbers you have seen in the last couple of quarters speak for itself that we have been -- grow this area pretty nicely and of course, we have been very cautious in terms of all the regulatory policies as well as license requirement for this particular area, and also being very cautious in terms of developing business that we do not actually grant credit and in -- to the users that are less qualified, basically. So we have very stringent moves in terms admitting [Phonetic] the borrowers from a platform. So currently, we have pretty much -- limit ourselves in the micro-loan business and also limit our micro-loan business to our existing users on platform. So we have a better, I mean track and understanding of the data and also their credit ratings. And so that actually helps us grow our business as well as to actually contain our -- the bad debt rate to a pretty low percentage. So going forward, probably we will follow the same strategies in terms of our fin-tech business and on the one hand, we'll continue to grow this business and to make sure that we can enhance our ability to have the data mining and to actually have a better quality customers going forward as well.

On the other hand, that we can also -- I mean, make sure that we'll, actually whatever we do, we'll follow the regulatory policies and these are the two areas that we're very much concentrated on and we believe that, as I said, this is a business has a lot of potential. And you can see all the big Internet players have invested heavily in this area. And so I think, we will have a very good potential here. But we are very cautious and in terms of our execution, to put it this way, so that we can control our risk.

Alicia Yap -- Citigroup -- Analyst

Thank you.

Charles Chao -- Chief Executive Officer

Thank you, Alicia.

Operator

Thank you. Your next question comes from the line of Thomas Chong from Jefferies. Please ask your question.

Thomas Chong -- Jefferies -- Analyst

Hi, Charles. Bonnie and Sandra, thanks for taking my questions. I have two questions. One is about the advertising sentiments for key categories in portal. How is it versus Weibo? About the performance for different key categories? And my second question is, we looked hat the OpEx is controlling very well in the second quarter. How should we think about the trend in operating expenses? And my last question is about our M&A strategies, given the recent Weibo bond offering. Thank you.

Charles Chao -- Chief Executive Officer

Okay, let me take one up -- and one by one, OK. Regarding the advertising area and if you look at the portal business, I'm sure that we have already elaborated that -- some of the key areas for the Weibo and for portal, I think, if you look at our businesses also between KA and SMEs. And the KA is doing relatively, OK. But in an SME is not doing very well.

And I think the key area for the KA will have -- seeing some of the challenges in the automobile industry for KA mainly because of this entire industry actually is not doing very well, as you have seen probably in the -- some of the data in the market that the automobile sales in the second quarter actually was down by at least 20% year-over-year. And that is quite significant and that actually has impact our portal advertising business in that particular area, we have seen similar trend in this area although our Weibo other [Phonetic] business is doing OK. But in terms of our portal, because we do not have enough product to support this budget allocation.

So we -- has seen pretty significant downturn in automobile advertising for this particular sector on portal and for other sector, actually we have seen some of the bright spot is actually in our financial service and we have been -- pretty much focused on our financial vertical area, earning [Phonetic] for our news and for the financial APP. And so we also develop a separate sales force for financial service for the portal business and that sector actually is doing much better compared to last year and we see that momentum also going very well. But in terms of the size of the business, is still smaller, much smaller than automobile business. So it has potential, but the -- in terms of net dollar impact, it's business still for the KA business. And for FMCG and we have seen some strong, mainly growth in the Weibo area, but it's not something that's very good for portal because we do not have right product for FMCG advertising for portal business. And for other categories, I mean, I think, it's -- they are less important but on an overall basis, you have seen some of the downtrend for the portal KA areas for other sectors.

And for the SME, in this area, we have particularly facing challenge in the portal business, because our overall inventory is not significant. If you look at the traffic, our mobile news pack versus our mobile portal. And you see some of -- slight increase of our mobile APP news app and in terms of traffic. But in terms of mobile portal, we see a slight decrease. So net net, we're not only increasing our inventory too much for our mobile news business. And -- but if you look at the entire market demand and supply, and you have a lot of supplier in mobile news app business, in terms of advertise inventory. So SME in terms of scale and everything else is not really that competitive in the market. So actually we see quite significant downturn in SME business for the portal. So that actual is the overall summary, in terms of our ad business for portal. And in terms of OpEx and I think the trend. Definitely, I mean, in like this kind of market situation and our advertising revenue trend.

We obviously try to control our cost much more tightly, so we have implemented stringent cost control measures for portal and we'll continue to do so. And then [Indecipherable] that may be going to next year and so on an overall basis, I think our -- we're still going to scale down our cost base for our portal. But it was exception that we might expand our investment in the financial area and sports area. So these are two vertical areas, we see quite strong momentum in terms of user growth and ad revenue growth.

So these areas, we will probably be more focused upon in terms of our overall growth. But with remaining of the portal areas, we will scale down little bit in terms of cost. And with M&A strategies, and I think, we'll be very cautious. I mean, on SINA side, we're quite cautious in terms of our M&A because this mark is quite unstable right now. And so with a lot of APP and Internet companies going away. That this particular market, is either you -- something that's very big. Or your investment just going to zero. So we'll be very cautious in this kind of market condition. In terms of Weibo, we'll be more focused upon invest in areas that they'll have the ability to establish or enhance our ecosystem for the entire Weibo in terms of content, in terms of user base and in terms of advertising. And in terms of SINA's areas, we'll probably -- will be more focused upon some of the vertical areas. We see the potential like financial and sports. And also that we'll be looking into some other new areas that will potentially have some big hit like we have increased our investment in our automobile, autonomous driving company called TuSimple this quarter -- in the second quarter by almost US$90 million. We believe this area, this company, is a leading position in the world and we see a lot of potential there in those areas. We believe that we could invest more, but for other areas, we'll be more cautious.

Thomas Chong -- Jefferies -- Analyst

Thank you, Charles for the detailed answer. Thank you.

Charles Chao -- Chief Executive Officer

Thank you.

Operator

Thank you. I'd now like to hand the conference back to Ms. Sandra Zhang, for closing remarks.

Sandra Zhang -- Investor Relations

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

Operator

[Operator Closing Remarks]

Duration: 23 minutes

Call participants:

Sandra Zhang -- Investor Relations

Bonnie Yi Zhang -- Chief Financial Officer

Charles Chao -- Chief Executive Officer

Alicia Yap -- Citigroup -- Analyst

Thomas Chong -- Jefferies -- Analyst

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