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Sina Corporation (NASDAQ:SINA)
Q1 2020 Earnings Call
May 19, 2020, 8:10 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by and welcome to the SINA First Quarter of 2020 Earnings Conference Call.

[Operator Instructions]

I would now like to hand the conference over to Sandra Zhang. Please go ahead.

Sandra Zhang -- Investor Relations Officer

Thanks, operator, and hello, everyone. Thank you for your patience. Welcome to SINA's earnings conference call for the first quarter 2020. Joining us today are 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 statements 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 includes non-GAAP measures, which may exclude stock-based compensation and certain other items. We use non-GAAP measure 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 the reconciliation of GAAP to non-GAAP measures.

During the call, we may discuss non-GAAP measures for Weibo, which applied the same methodologies we use to calculate non-GAAP measures at the SINA group level. After management remarks, we'll open your 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 first quarter 2020. 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 first 2020 results. SINA's net revenue for the first quarter was $432.4 million, a decrease of 8% or 4% on a constant currency basis. Operating income was $57.1 million, representing an operating margin of 13%. Net income attributable to SINA was $17 million, and the diluted EPS was $0.26.

Now let's turn to key financial items. SINA's advertising revenue for the first quarter were $310 million, a decrease of 20% or 16% on a constant currency basis, primarily due to the adverse impact of the coronavirus pandemic on the overall advertising demand as well as negative currency translation impact. Let me first give you some color on Weibo's business. Amid this unprecedented coronavirus pandemic, Weibo has demonstrated its indispensible value as China's leading social media platform to keep the public informed, connected, and engaged. In March, Weibo's MAU reached 515 million adding approximately 85 million users year-over-year, average DAU reached 241 million, adding approximately 30 million [Phonetic]. The record high net additional Weibo MAU and DAU was a testament to our differentiated positioning in the market, which enabled us to achieve organic growth, sustain solid user retention and to reinforce our strengths around public conversation, hot events and the social content ecosystem.

On the monetization front, Weibo's advertising and marketing revenue for the first quarter was $275.4 million, a decrease of 19% or 16% on a constant currency basis, which is in line with our expectation given the overall demand constraints related to the pandemic. Weibo's key accounts business decreased 24% or 21% on a constant currency basis as advertisers from various industry had canceled or suspended marketing campaigns in the wake of the virus outbreak since late January, but have exhibited a gradual recovery trend since March. Industry-wise, those sectors of heavy offline exposure or discretional nature took a harder hit than others, such as the movie and the luxury industries. Despite near-term pressures from the demand side, the silver lining is that the pandemic accelerates the ad budget shift from offline to online as well as toward a social and a video within the online budget. With this understanding, our team pivoted quickly and marshaled our resource to address customers' needs of online product promotion, as well as beefed up our efforts in pushing video and video ad penetration. These efforts all together contribute to a solid recovery for the handset and automobile sectors in March. Ad revenue from Alibaba grew 66% or 73% on a constant currency basis. We are delighted to see a solid ad revenue growth from Ali underpinned by its own resilience against the challenging environment particular after resumption of the logistical capability in March.

Turning to SME, Weibo's SME ad revenue was down 23% or 19% on a constant currency basis. The robust growth in several online sectors such as gaming and education was offset by the general softness across other categories with offline exposure. On the upside, our restless efforts to drive the adoption of optimized CPX continue to bear fruit leading to a relatively stabilized ad pricing despite the downturn in ad demand. Leveraging such high adoption of optimized bidding and improved targeting capability we have gradually accumulated industry insight and tailored our offering to better serve industry-specific needs. The progress toward the industry-specific ad solutions had already manifest itself in delivering high ROI for top gaming and online education customers as well as improving our overall monetization efficiency.

Turning to SINA media and advertising business. In the first quarter, we see robust traffic growth of our media properties. With the average DAU of SINA News app and SINA Finance app growing approximately 49% and 158%, respectively, on a year-over-year basis. This further demonstrates SINA's brand equity as the leading online media platform with years of experience in providing timely, curated and trustworthy media information to the public, especially during the crisis period. On monetization, SINA media advertising revenue for the first quarter was $36.7 million, a decrease of 22% or 18% on a constant currency basis, reflecting an adverse impact on advertising business from the coronavirus pandemic.

Turning to the non-advertising business. SINA's non-ad revenue for the first quarter were $122.4 million, up 45% or 51% on a constant currency basis, mainly attributable to increased revenue from SINA Fintech business. In the first quarter, SINA Fintech generated $79 million in revenue, up 145% year-over-year, primarily due to growth in loan facilitation volume as well as gross reporting of certain Fintech revenue as required by ASU 2 2016-13. We will continue to navigate through the evolving regulatory landscape, interest rate policy as well as potential deterioration in the general credit profile brought forth by the pandemic. That said, we expect to take a measured approach to scale up our Fintech business built upon our strength on minimal traffic cost, available institutional funding and a sound credit control system.

Turning to gross margin. Gross margin for the first quarter was 67% compared to 76% last year. Advertising gross margin was 76% compared to 79% last year. Non-advertising gross margin was 43%, down from 63% last year, primarily attributable to the adoption of the current expected credit losses methodology in estimating allowance for credit loss for our Fintech business and the reporting revenue and the costs on a gross basis for certain Fintech business.

Now moving on to operating expenses. In the first quarter, operating expenses decreased 6% to $231.7 million. Operating income for the first quarter was of $57.1 million, representing an operating margin of 13% compared to 24% last year as disciplined spending in response to the pandemic could not fully offset its impact on the revenue side. Under the GAAP measure, non-operating income for the first quarter 2020 was $126.7 million compared to [Technical Issues] million for the same period last year. Non-operating income for the first quarter included $153.5 million gain on deemed disposal; and a $47.1 million net loss on sale of investment, fair value changes and impairment on investments, which is excluded under non-GAAP measures; a $15 million net earnings from equity method investments, which is reported one quarter in arrears; and a $5.2 million net interest and other income.

Please refer to our earnings release for more detailed information on reconciliation of GAAP to non-operating item for the same period last year. Turning to taxes. Under GAAP measure, income tax expenses were $25.8 million in the first quarter compared to $65.2 million last year, largely attributable to a decrease in deferred tax charges recognized from the fair value changes of investments as well as reduced profitability.

Net income attributable to SINA was $17 million and the diluted EPS was $0.25 dilutive net income per share. Now let me turn to balance sheet and the cash flow items. As of March 31, 2020, SINA's cash, cash equivalents and short-term investments totaled $2.7 billion, compared to $2.9 billion as of December 31, 2019. The decrease of SINA's cash, cash equivalents and short-term investments was mainly resulted from execution of share repurchase program and investment activities. For the first quarter of 2020, net cash provided by operating activities was $77.3 million, CapEx totaled $11.1 million and depreciation and amortization expenses amounted to $11.5 million.

Before turning to Q&A., I would like to give a quick update on the progress of our share repurchase program 2020. So far, we have repurchased approximately 3.2 million share for approximately $98.4 million under the $500 million authorized amount. We will continue with our share repurchase on market opportunity basis and seek to unlock the value of the company and then maximize the shareholder return in the longer term.

With that operator, please open up the call for questions.

Questions and Answers:

Operator

[Operator Instructions]

Our first question will come from Eddie Leung of Bank of America Merrill Lynch. Please go ahead.

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Good afternoon and good evening. I have a question on your Fintech business, I remember, I think, Charles in the fourth quarter 2019 results, both you and Bonnie kind of like cautioned on the outlook of the Fintech business claiming that you would take a more cautious approach. I'm just curious on the strong performance in the first quarter. Was it a change of strategy or was it something, let's say, from less competition in the market that generated, let's say, some surprisingly strong user demand for you guys. So, any color on the background of the strong portfolios of your Fintech business in the first quarter? Thank you.

Charles Chao -- Chief Executive Officer and Chairman of the Board

Okay, Eddie. Regarding the Fintech business, you're right. We said we're going to be cautious in this business this year. And I think we will continue to be very cautious going forward for the remaining year. And if you look at numbers, although, you saw probably a significant increase in revenues in Q1 on a year-over-year basis but this is more due to accounting change in revenue accounting. And so if on the same basis, we probably saw about 50% increase in revenues on a year-over-year basis. And if you look at our current quarter is what probably you will see this revenue growth significantly coming down in the second quarter. I think this business as we said before, it has a lot more regulations now and lot of restrictions in terms of what you can do, what kind of rate you can charge, so on and so forth.

And what we have seen this year is that there's more restrictions on the rate, and although, legally you can actually charge probably under 36% on IRR basis. But actually a lot of financial institutions would like to see lower rate if they provide funds for these kinds of loans. So actually, we're seeing lower rate that we can charge our consumers on our internet micro loan. And thus, I mean, there would be more requirements, I would say in terms of the risk control and also in terms of increase the barrier for the customers you can loan the money to. And so this trend continues, probably will continue throughout the year. And on the other side, I mean, if you look at first quarter because of the coronavirus and especially in the first one and a half months, I mean, the entire nation was probably locked down. And there was virtually no collection efforts from any of these Fintech companies and there has been some quite significant increase in terms of the first default rate for the customers and hence, higher, better rate, we had to book in the first quarter.

But of course, in the month of March and in April, we thought that default rate comes down as we started to collect the loan again, started our collection effort again. But still the current default rate is still a little bit higher than we have seen before the coronavirus. So from both sides, we want to be more cautious in terms of business going forward. And but having said that, we still think this is a business we're going to see a lot of players going out of business and in the near future. And so that would provide us more opportunity on a relative basis, but on a overall basis, we still want to be very cautious.

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Understood. Thank you very much.

Charles Chao -- Chief Executive Officer and Chairman of the Board

Thank you.

Operator

Your next question comes from Thomas Chong of Jefferies. Please go ahead.

Thomas Chong -- Jefferies -- Analyst

Hi, thanks management for taking my questions. I have a question about the advertising market trend, as well as our strategies in our portal business. Given that the traffic was in the News app and Finance app also shows a very strong traffic growth. Can management comment about how we are seeing the traffic in April and May so far? And on that front, given the coronavirus is fading out, how should we think about the advertising sentiment as we come into the second half? And on that front, can you comment about the competitive landscape, in particular, the competition from short form video? Thank you.

Charles Chao -- Chief Executive Officer and Chairman of the Board

Okay. Regarding advertising market, I mean, in terms of our portal business, you're right, we have two major platforms, one is our news app, the other is our finance app. And the both as you correctly pointed out that we have seen pretty healthy traffic and user growth in the sector in the first quarter. And mainly due to the coronavirus, I think there is a major pickup of internet usage across the board, and especially for those news app that we provide on time -- in time basis of the coverage of coronavirus and user engagement in that particular topic. And so the traffic and user growth were pretty strong, probably more so on the news app, less so on the finance app, but then we did see some of the decline in April and that can -- decline probably continue in May, but still, I mean, the traffic has been quite significant and also they were both higher, even in May were higher, quite higher than the traffic we saw before the coronavirus during the month of January. And so that's the trend we see in the traffic.

But on the advertising side, it's a different picture and two sides; one is our KA market, branding advertising market. And this is similar to what we saw in Weibo probably more so, more challenging in the portal area for KA business. We saw significant decrease in our KA business, advertising business in this first quarter in portal area. And it's probably across the board with one exception is the real estate market, two, one or two particular client. They contribute significant portion of our KA advertising businesses in the first quarter. So without that, we probably were seeing quite a significant decrease. And right now, probably we saw about around 10% decrease in KA advertising, but without that real estate client that would probably see much, much worse performance.

And that can probably continue in the second quarter, but it will be slightly better in the second quarter. And on an overall basis we're probably seeing mid-teen percentage decline on year-over-year basis on the KA market. And we probably don't have enough visibility for the second half for the portal business yet, but overall, the trend is that even with the recovery of the market there will be more challenging overall basis in the entire brand of advertising market for the online space in China, particularly because what you correctly pointed out where the competition from the short video platforms. I think that began to take a lot more market share in this space. And so it's going to be quite challenging and it's more challenging in SME businesses and we saw more than 50% decline in the first quarter and the second quarter will be still challenging. And I think these short video platforms are taking more market share for the performance-based SME business and the brand advertising businesses. And so overall, it's not that very positive trend for the advertising business for the portal and -- but I think we have our own problems in the SME business as we said before. And we probably did not establish a very healthy sale channel, sales channel and the sales team for the SME businesses. And so our overall pricing for the SME business performance advertising were quite low compared to the market. To that particular point, we see we think we have a significant room to improve on the pricing side, but the overall advertising revenue side is still going to be very challenging.

Thomas Chong -- Jefferies -- Analyst

Got it. Thank you, Chao.

Charles Chao -- Chief Executive Officer and Chairman of the Board

Thank you.

Operator

There are no further questions at this time. I'll hand the call back over to Sandra Zhang for closing remarks.

Sandra Zhang -- Investor Relations Officer

Thanks operator, and thank you all for joining us. This concludes our conference call today. We'll see you next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 23 minutes

Call participants:

Sandra Zhang -- Investor Relations Officer

Bonnie Yi Zhang -- Chief Financial Officer

Charles Chao -- Chief Executive Officer and Chairman of the Board

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Thomas Chong -- Jefferies -- Analyst

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