- Sina reported good second quarter fiscal 2015 results.
- The company's results have been given a nice boost by Weibo, its leading subsidiary.
- Sina's mobile transition appears to be working.
- This means the shares have good long-term upside potential.
Sina Corp. (NASDAQ:SINA), the Twitter of China, reported good Q2 fiscal 2015 results that managed to comfortably beat consensus on both top and bottom line. Sina reported second quarter revenue of $211 million, good for 14.4% Y/Y growth and 640 basis points better than first quarter growth. The revenue managed to comfortably beat consensus estimates by $11.22 million. Meanwhile, Sina earnings (NOn-GAAP) came in at $0.06, 2 cents better than estimates and $0.02 higher than first quarter EPS.
Most of Sina’s other growth metrics were positive: gross margin of 60% compared to 58% during the first quarter and 61% during last year’s comparable quarter; operating expenses recorded tame growth after expanding just 3% to $120.1 million, while advertising revenue, the company’s largest revenue segment, was up 13% Y/Y to $176.3 million compared to 11% growth during the first quarter.
Despite the healthy beat, Sina shares were up by a modest 3%, as the company once again failed to provide quarterly guidance while the recent move by Beijing to devalue the Yuan continued to weigh heavily on Chinese stocks. Sina stock had tumbled nearly 7% coming into the earnings week partly because of general investor pessimism and, of course, because of the Yuan devaluation. The shares are up 4% YTD.
But, it was Weibo (NASDAQ:WB), Sina’s largest subsidiary that once again saved the day for the Internet giant.
Pivoting on Weibo’s Success
Weibo remains a very important part of the puzzle for Sina since it still retains a 56.9% majority stake in the company after spinning off the rest to the likes of Alibaba (NYSE:BABA) in 2013. Weibo’s marketing and advertising strength have been pivotal to Sina for a long time, and the last quarter was not any different. Weibo normally reports its results on the same day as Sina. During the quarter, Weibo reported revenue of $107.8 million, representing 39% Y/Y growth. The revenue was much better than the company’s guidance of $102 million-$105 million.
The real focus, however, was on advertising revenue, which was up a healthy 47% to $87.9 million. Weibo not only provided a nice boost to Sina’s top line, but also to its bottom line as the company swung to a profit of $4.2 million compared to a net loss of -$15.5 million during the prior year period. Meanwhile, Weibo’s monthly users jumped 36% Y/Y and 7% Q/Q to 212 million, thus continuing the company’s trend of strong MAU growth.
But the most important takeaway from the report was that Sina’s operating expenses, whose recent northbound trend has been badly impinging on Sina stock price performance, have slowed down considerably thus allowing the company to become profitable. Sina shares have been badly hammered over the past few years as the company’s operating expenses continued to grow at a much faster clip than its top line thus putting enormous pressure on profitability. This trend has been caused by the company’s heavy expenditure as it tries to transition from its traditional ad-driven revenue model to a mobile-driven transactional model.
Sina 3-Year Share Performance
But with the company now having managed to place its operating expenses on a tight leash, things are now beginning to look up.
Can Sina Continue Delivering?
The quarter turned out to be quite good for Sina even after factoring in low investor expectations. But it’s beginning to appear as if Sina’s performance will continue to be largely determined by Weibo’s a la eBay and PayPal, with the smaller company growing faster than its parent.
Sina vs. Weibo 1-Year share performance (Bold line=Sina; Green Line=Weibo)
Source: CNN Money
The good part is that earlier worries that Weibo’s growth would be severely curtailed by growing competition from the likes of WeChat appear to have been overdone. Weibo’s growth has remained encouraging in the midst of fierce competition in the Chinese Internet space, and this is an encouraging trend for Sina shareholders.
Sina’s long-term outlook will depend on the success of its transition to a mobile-driven revenue model. It’s slowing operating expenses probably mean that the company has moved from the capital and infrastructure-intensive part of the project and is now in the consolidation phase. Sina investors should pay close attention to what the company will have to say about this during its next investor presentation. The fact that Sina CEO Charles Chai recently agreed to purchase Sina shares worth $456 million did a lot to assuage the nerves of jittery investors who were not sure whether the company was on the right track. Sina has in the past suffered from allegations of accounting malpractices, and the move came at the right time to help restore confidence in the company.
The short-term outlook for Sina and other Chinese stocks, however, remains gloomy. The Chinese markets remains too murky, and the recent devaluation of the Yuan poured more fuel in an already raging bonfire. For long-term investors, this might be a good time to open up new positions in the shares. HSBC recently raised its Sina PT from $47 to $67 (72% potential upside) saying that the company’s transition was on the right track. It’s quite likely that the investment bank is privy to information that ordinary shareholders might not be aware of regarding the company’s ongoing transition.