SINA Corp. (SINA - Analyst Report) reported third-quarter 2014 earnings of 11 cents per share, which were much-better than the Zacks Consensus Estimate of 4 cents. However, earnings declined from 35 cents per share reported in the year-ago quarter.

Quarter Details

Revenues (adjusting for deferred revenues of $2.6 million, mostly related to license agreements pertaining to the E-House/CRIC transaction) increased 9% year over year to $196 million and were in line with the mid-point of management’s guided range of $193 million to $199 million. Revenues however missed the Zacks Consensus Estimate of $198 million.

Advertising revenues moved up 10% from the year-ago quarter to $166.8 million. The year-over-year growth in online advertising revenues resulted from an increase of $21.7 million in Weibo advertising revenues, offset by a decline of $6.5 million in portal advertising revenues.
    
Non-advertising revenues decreased 3.8% year over year to $31.8 million in the quarter. Non-GAAP non-advertising revenues for the third quarter of 2014 were $29.2 million compared with $28.4 million reported in the prior year quarter. The year-over-year change in non-GAAP non-advertising revenues was mainly due to an increase of $9.1 million in Weibo value added services (VAS) revenues, partially offset by a decline of $7.4 million in mobile value added services (MVAS) revenues.

Weibo revenues jumped 58% year over year to $84.1 million. Monthly active users for month of September grew 36% on a year-over-year basis to 167 million in the reported quarter. Portal revenues declined 12.8% year over year to $114.5 million.

Gross margin declined 10 basis points to 63% in the reported quarter. Advertising gross margin for the third quarter of 2014 was 62% versus 64% reported in the prior-year quarter. Non-advertising gross margin for the third quarter of 2014 was 67%. Non-GAAP non-advertising gross margin for the third quarter of 2014 was 64% compared with 58% in the year-ago quarter, resulting from a shift in revenue mix from low-margin MVAS to higher margin Weibo VAS.

Non-GAAP operating expenses for the third quarter of 2014 totaled $127.1 million compared with $90.5 million in the prior year quarter, primarily due to higher personnel costs, marketing expenditures and bad debt expenses.

SINA reported net income of $6.9 million or 11 cents compared with $23 million or 35 cents reported in the year-ago quarter.

SINA exited the third quarter with cash, cash equivalents and short-term investments of $2.30 billion, which remained flat sequentially. Cash provided by operating activities in the third quarter was $100.4 million.

Outlook

SINA expects revenues for the fourth quarter of 2014 in the range of $204 million to $210 million while the Zacks Consensus Estimate for the same is pegged at $215 million. Management believes that increasing investment by Weibo on product development and marketing will hurt it as well as SINA’s operating results in 2014. SINA expects to invest further in its own portal (mobile and video) that will also keep margins under pressure.

Our Take

We believe that SINA remains a premier company based on its strong product pipeline, continuous investments in product development and marketing and a robust user base for its e-commerce and Weibo offerings.

However, the recent licensing issue with the Chinese government is a major headwind, which will negatively impact brand revenues in the near term. Although the investments in mobile and video are long-term positives, these will hurt profitability for the rest of 2014.

Moreover, Weibo is expected to face stiff competition from the likes of WeChat in China, which will hurt its user base. We believe that Weibo’s monetization ability will be a major driving factor for SINA amid increasing competition from the likes of Sohu.com Inc. (SOHU - Analyst Report), NetEase (NTES - Snapshot Report) and Youku Tudou (YOKU - Snapshot Report) in the video and brand advertising market.

Currently, SINA has a Zacks Rank #3 (Hold).