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SINA Corporation (NASDAQ:SINA)

Q3 2008 Earnings Call Transcript

November 12, 2008 8:00 pm ET

Executives

Cathy Peng – IR Manager

Charles Chao – President and CEO

Herman Yu – CFO

Analysts

Jason Brueschke – Citigroup

Wallace Cheung − Credit Suisse

Eddie Leung − Merrill Lynch

Ming Zhao − SIG

Dick Wei − JP Morgan

Tian Hou – Pali Capital

Muvi Lee [ph] – Morgan Stanley

Vivian Li – Piper Jaffray

Echo He – Oppenheimer

Wendy Huang – RBS

Paul Woo [ph] – Nomura

Operator

Good day, ladies and gentlemen, and welcome to SINA Corporation’s third quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode; however, we will be facilitating a question-and-answer session towards the end of this conference. I would now like to turn the presentation over to your host for today’s conference, Ms. Cathy Peng, Investor Relations Manager. Please go ahead, Ma’am.

Cathy Peng

Thank you. Good morning. Welcome to SINA's earnings release for the third quarter 2008. Joining me today are our President and CEO, Charles Chao, and our Chief Financial Officer, Herman Yu. This conference call is also being broadcast on the Internet and is available through the Investor Relations section of the SINA web site.

Before the management’s presentation, I would like to read to you the Safe Harbor statement in connection with today’s conference call. During the course of this conference call, we may make forward-looking statements, statements that are not historical facts, including statements about our beliefs and expectations. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements.

SINA assumes no obligations to update the forward-looking statements in this conference call and elsewhere. Further information regarding these and other risks is included in SINA’s annual report on Form 20-F for the year ended December 31, 2007, and its other filings with the Securities and Exchange Commission.

Additionally, I would like to remind you that our discussion today includes non-GAAP measures which exclude stock-based compensation, as well as other items. We use non-GAAP measures to exclude certain items that are not expected to result in future cash payments that are non-recurring or that may not be indicative of our core operating results. For further explanation of our non-GAAP measures and detailed reconciliations between our GAAP and non-GAAP results, please refer to our earnings release.

Following management’s prepared remarks, we will open the lines for a brief Q&A session.

With this, I would like to turn the call over to our President and CEO, Charles Chao.

Charles Chao

Thank you, Cathy, and good morning everyone. Welcome to SINA’s third quarter 2008 financial results conference call. I am very pleased to report another strong quarter with record revenues and earnings. We are very excited at the momentum that both our core businesses in online advertising and mobile business has continued to accelerate in the third quarter helped by Beijing Olympic Games and the continued improvement of the upgrading environment for mobile business.

For the third quarter, our total revenues grew by 64% year-over-year to reach $105.4 million and for the first time in SINA’s history, our total quarterly revenues exceeded $100 million. Our advertising revenues grew by 66% year-over-year and 17% quarter-over-quarter, to reach $76.2 million. Our mobile revenues grew by 63% year-over-year and 11% quarter-over-quarter to reach $27.1 million. The non-GAAP net income totaled $26.8 million for the third quarter, representing a 40% increase from the same period last year.

Now, let’s take a closer look at our performance for the third quarter. During the third quarter, we successfully executed our Olympic strategy by delivering an excellent multimedia interactive coverage for our users and providing a powerful marketing platform for our advertising clients. Despite a very competitive market, SINA once again demonstrated its leadership position and execution ability in major sports event.

In some ways, SINA has showcased the world the very best that Internet media can do for major sports coverage. During the Olympic game period, our video platform recorded over 200 million viewerships for game-related video clips and our browsing platform produced millions of game-related browse.

According to various independent third-party research and surveys, SINA’s Olympic site ranked no.1 in both number of visitors and traffic during the Olympic Games. One important third-party report was mentioning – the report issued by ChinaRank which ranked SINA Olympic site no. 1 with significantly higher number of visitors than the second place in China.

ChinaRank together with its partner, Nielsen/NetRatings is officially authorized third party to provide such rank in China during the games. Not only did we deliver the best coverage for our users, we have also provided most powerful online marketing platform for our clients. Although there is no official comparison of advertising revenues among Internet portals, we have full confidence that SINA generated significantly high advertising revenues from Olympic event than any other web site in China.

Needless to say, our successful execution of Olympic strategy has helped us to further solidify our competitive edge among Internet portals in China by enhancing SINA brand of connection, bringing more users and advertising clients.

In terms of advertising revenues, we had a great quarter with year-over-year growth of 66%. SINA’s strong verticals continued to perform well. Advertising revenues from automobile, finance, and real estate – our three top verticals grew between 87% to 98% on a year-over-year basis. However, those three verticals only accounted for 52% of our total revenues, total of the advertising revenues for the third quarter, down from 58% for the second quarter. We have two more growth drivers this quarter. Advertising revenues from telecom service grew 154% year-over-year. Other ad revenues from FMCG grew approximately 100% year-over-year for the third quarter. These two categories accounted for 16% of total ad revenues for the third quarter.

With recent global financial crisis and the turmoil in stock markets, much of the attention from investment community has been devoted to the future of Chinese advertising market in general and the Chinese online advertising market in particular. I would like to spend some time to talk about our assessment of current market situation as well as direction of this market ahead.

There is no doubt that the global financial crisis and the globalization have already had a significant negative impact on Chinese economy and that we are seeing a slowdown in economic activities across the board in post-Olympic China, and that inevitably will impact advertising market or at least create uncertainty in the market.

For the fourth quarter, although we have not seen cancellations of made advertising contracts, we feel that advertising clients in general have become more cautious in their spending. Amongst our three major verticals, with little impact for automobile and housing sectors for the fourth quarter, the financial sector has become slightly weaker in growth rate due to continuing weakness in the stock market.

Overall, we have projected approximately 40% year-over-year advertising growth for the fourth quarter which is pretty much in line with our growth rate in ’06 and’07, the years without any impact of Olympic effect, which in our view is a perfectly normal growth rate.

However, the current cautious sentiment in advertising market, if continues, may impact the timing of the budget process of our advertising clients and provide us with less visibility for next year at the current stage. While it is too early for us to project the expected growth rate for advertising for next year, given the current market sentiment, there are a few trends I would like to share with you here.

First, it is clear that Chinese government is determined to do whatever it takes to stimulate the Chinese economy and maintain a relatively high GDP growth rate. Just a few days ago, the Chinese government announced a 4 trillion RMB stimulus package. In addition, both central and local governments in China have recently come up with various plans and policies to stimulate the housing market and there are more policies in the pipeline if current plans prove to be inadequate. It is expected that the growth of Chinese economy will be more fueled by domestic consumptions which in turn will create more need for brand advertising in China.

Secondly, Chinese Internet portals have increasingly become the leading media platforms in China with rapid growth of Internet users. This is more so after Internet media’s hugely successful coverage of Sichuan earthquake in May and the Beijing Olympic Games in August.

Our experience in covering the Olympic Games indicated that the Chinese Internet users are much more dependent on Internet media as their media sources than their counterparts in other countries. In time of economic slowdown and a reduction in total advertising budget, advertisers are becoming more selective in media selection in favor of media platforms with better reach, more precise measurements and more cost effectiveness. Therefore, we will see an accelerating shift of advertising budget from offline to online going forward, given the strength of Internet media in China.

In fact, our channel checks have indicated that a majority of our clients have plans to increase their budget allocations to Internet next year. Certainly, we believe SINA’s position as the leading online media and online advertising platform and our proven execution ability will help us to become a major beneficiary for this trend of budget shift from offline to online.

Although, the auto sales units only grew by slightly over 10% in the first nine months of this year, SINA managed to grow our auto advertising revenues by 87% in the same period. We also see the same pattern in the housing sector and the financial service sector where SINA’s advertising revenues doubled in the first nine months when the entire housing market and stock market is experiencing a significant decline.

In summary, although we don’t have enough visibility for the advertising market in general for next year, we’re confident that SINA will remain competitive in a much more challenging market environment for the reasons I discussed above.

Before I turn to Herman for financial review, I’d like to talk briefly about our mobile business. In the third quarter, our mobile business continued its nice rebound with 63% growth in revenues year-over-year. We’re also pleased to continued diversifications of product lines as well as the continued diversifications of marketing channels for our mobile business. MMS, IVR, and KJava games were the key products that drove the mobile revenue growth in the third quarter. We continue to see healthy growth in mobile business in the fourth quarter and this trend will likely continue next year.

With that, I am now turning to Herman for financial highlights for the quarter.

Herman Yu

Thank you, Charles, and thank you all for joining our conference call. Let me take you through the key financial highlights. SINA’s total revenues for the third quarter of 2008 hit its historical high of $105.4 million, which exceeds our guidance between $100 million and $104 million, representing a 64% growth year-over-year and a 15% growth quarter-over-quarter. Our advertising revenues for the third quarter of 2008 were $76.2 million, a 66% growth year-over-year and a 17% growth quarter-over-quarter.

Average advertising revenues from China grew 68% year-over-year and 17% quarter-over-quarter to $75.2 million. Revenues per advertiser in China increased 57% year-over-year while the number of customers in China grew 7% year-over-year.

As Charles mentioned earlier, SINA had a very successful coverage of the 2008 Beijing Olympics in the third quarter. Our industry recognized quality coverage of major events and high-end users allowed us to draw many Olympic sponsors and Olympic-related advertisers across various industry sectors. Consequently, we saw a triple-digit growth year-over-year in online advertising revenues from sectors such as telecommunication and fast moving consumer goods advertisers.

Despite China’s attention turning to the 2008 Beijing Olympics during the third quarter, momentum from our top-three sectors continued. During the third quarter of 2008, automobile grew 98% year-over-year, while financial services grew 87% year-over-year. We also saw strong momentum in the real estate advertising market which grew 87% year-over-year during the quarter.

Turning to SINA’s non-advertising business. For the third quarter of 2008, our mobile business generated revenues of $27.1 million, representing an increase of 63% year-over-year and 11% quarter-over-quarter. SMS and IVR, which makes 66% of total mobile value-added services revenues, grew 37% quarter-over-quarter while revenues from 2.5G products, which includes MMS, WAP, and KJava decreased 20% sequentially. The net increase in mobile revenues was mainly due to relatively more stable operator policies, government regulations, and business environment. Sequential changes by product line mostly reflected the allocation of promotional activities to maximize the return on our marketing efforts.

Our non-GAAP gross margin for the third quarter of 2008 was 58% compared to 63% in the same period last year and 63% last quarter. Our non-GAAP advertising gross margin for the third quarter was 59% compared to 65% in Q3 ’07 and 65% last quarter. The decline in gross margin was mainly due to the incremental acquisition of contents related to the Beijing Olympics.

Non-GAAP gross margin for our wireless business was 53% in the third quarter of 2008 compared to 56% in the same period last year and 55% last quarter. The decline in non-GAAP wireless gross margin was mainly due to increased cost from revenue sharing arrangements.

Turning to operating expenses, our non-GAAP operating expenses for the third quarter of 2008 was $36.9 million, up 60% year-over-year and 10% sequentially. The increase in operating expenses was mainly driven by higher marketing expenses associated with the Beijing Olympics and to a lesser extent, higher sales and engineering-related payroll and other personnel expenses.

Our non-GAAP operating margin for the quarter was 23% compared to 27% for the same period last year and 26% last quarter. The decline in non-GAAP operating margin was mainly due to Olympic-related spending.

Interest and other income for the third quarter was $7.1 million. During the quarter, the company also had an investment loss of $800,000 as a result of acquiring a majority stake in a web application development firm with approximately 70 personnel. The write-down of intangible assets occur as part of a follow-on investment.

Turning to income taxes, provision for income taxes for the third quarter of 2008 was $4.4 million, compared to $1.7 million last year, and $4.2 million last quarter. The company made a provision for PRC income taxes for the third quarter of 2008 based on effective tax rate of 16% for the operations in China.

Turning to net income, non-GAAP net income for the quarter, which excludes stock-based compensation and other items, was $26.8 million, an increase of 40% from the same period last year and an increase of 3% from last quarter. Non-GAAP net margin for the third quarter of 2008 was 25% compared to 30% in the same period last year and 29% last quarter. Non-GAAP diluted EPS for the quarter was $0.44 compared to $0.32 in the same period last year and $0.43 last quarter.

Turning to our balance sheet and cash flow. As of September 30, 2008, our cash, cash equivalents and marketable securities were $562.5 million, an increase of $123.1 million from a year ago.

Cash flow from operations for the third quarter was $26.9 million compared to $19.6 million for the same period last year. During the quarter, our capital expenditure was approximately $5.6 million.

Let me now turn to our guidance for the fourth quarter of 2008. We are targeting total revenues of $98 million to $101 million. For online advertising, we are targeting $69 million to $71 million. For non-advertising, we are targeting $29 million to $30 million. Excluding any new shares that may be granted, we expect stock-based compensation to be approximately $3.8 million.

I like to remind everyone that this forecast is a forward-looking statement and that it reflects the company’s current and preliminary view, which is subject to change.

Before I turn this call over to the operator, I would like to add a few words. Despite extremely fierce competitive landscape in China’s online brand advertising space this year, we have focused and executing well in driving profitable revenues. For the first three quarters of this year, our non-GAAP net income grew 56% year-over-year, which is 3% faster than total revenues over the same period. This spectacular result was achieved in light of our competitor’s chasing low margin and in some cases, negative margins in order to boost advertising revenues. As we move beyond the 2008 Beijing Olympics, the challenges associated with competing in the period leading up and including the Olympics dissipate.

We are now faced with the deteriorating economic environment around the world and the challenges of a post-Olympic economy. In this new environment, there will be new challenges and opportunities. We will again leverage our scale advantage and prudent decision-making to capture profitable revenues as well as allocate adequately to worthwhile investments. We believed SINA’s leadership advantages in China’s online brand advertising space such as our large scale, brand influence, and unmatched content coverage, so on and so forth, will again allow us to be very competitive in navigating the current economic environment while taking advantage of the opportunities that may be presented to us in building long-term shareholder value.

With this, I now turn to our operator. Operator, we’re ready for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Jason Brueschke with Citigroup. Please proceed with your question.

Jason Brueschke – Citigroup

Thank you. Good morning Charles, Herman and Cathy, and congratulations on the quarter. My first question, maybe I’ll just key off at the closing words of Herman. You guys have executed extremely well and you have a tremendous amount of cash. My question is regarding the use of cash. Are you guys planning to do any major share buybacks? And considering that there’s probably going to be a number of interesting Internet properties, you may struggle if the overall amount of advertising shrinks or if new media does well, but the major portals do better within that. Are you guys planning on stepping up your M&A activity and would you buy, for example, maybe a social networking site to supplement your successful blogs? And then, I have a follow-up question. Thanks.

Charles Chao

Okay, Jason, this is Charles. In terms of use of cash, obviously, I mean given the current market situation, we are pondering on the possibility of a cash – stock repurchase depending on how the market is heading in the near future. And in terms of M&A, you’re correct, we are actually stepping up our efforts in this area, looking for properties and especially as you know that, under current market situation, that there will be more opportunities in the market in China with more reasonable valuations at this point. And obviously, we have always said that we want to reserve cash for M&A purpose and since like in the next 6 months or 12 months, there will be more opportunities in the market and we are actively looking. But in terms of specific target and areas, I don’t want to comment on this conference call because it’s kind of sensitive. I hope you can understand.

Jason Brueschke – Citigroup

Absolutely, thanks. My next question is, a tremendous amount of discussion about last quarter and then in your prepared remarks about what’s going on in the advertising world, but there’s probably been less discussion about your MVAS business and I was just wondering if you could give us some comments and thoughts on how defensive that business is likely to be in 2009 if the Chinese economy continues to slow?

Charles Chao

Well, I think that the MVAS revenues – that particular business, I think is less sensitive to the economic environment. I’m talking about macroeconomic environment in China and basically, it’s feed service with consumers and with each paying a very small amount of money, so I don’t think it will be very sensitive to the economic conditions in China right now. And in general, as I said in my opening remarks that this environment is getting healthier and it seems like the operation is pretty smooth right now and we seem to think that this trend will continue in ’09.

I think in ’09, in the current situation, there will be a few big SPs will actually probably perform better than the rest of the market and as I said before, that operating policies are provided by China Mobile. And another opportunity here is that with the restructuring of the Telecom Service Industry and now, China Telecom and also China Unicom are actually – have all become very interesting players in the mobile market which creates more competition in the market. And that, in our opinion, will work to SP’s favor to provide diversified services to different operators.

I think the market looks good currently. But, of course, I don’t want to project a very concrete number for next year but it seems like it will continue to grow next year.

Jason Brueschke − Citigroup

This is maybe a final housekeeping question for Herman. I may have missed this, but what’s the total amount of non-recurring Olympic costs that were incurred in the third quarter?

Herman Yu

I think in terms of content and marketing together, probably it is in the area of $9 million to $10 million.

Jason Brueschke − Citigroup

Perfect. Thank you guys and congratulations again.

Herman Yu

Thank you.

Operator

Your next question comes from the line of Wallace Cheung from Credit Suisse. Please proceed with your question.

Wallace Cheung − Credit Suisse

Hi, good morning Charles, Herman and Cathy. Again, congratulations on a very good quarter. Two key questions, number one is, obviously it’s very difficult for management to comment on 2009 growth projections but based on your channel checks and based on discussion with the advertisers, can you give us a little more color on which are the growth drivers that you are actually looking for? And at the same time, how can you control the management risk in terms of the potential shortfalls in a couple of sectors regarding automobiles and real estate?

And the second question is regarding the Accounts Receivable Management, obviously I think the DSO based on my calculation in the third quarter seems to be rather [ph] flattish. But going forward, are we going to see there would be potential risks or further bad debt provisions, or even any kind of write-down of accounts receivable (inaudible) risks as well? Thank you.

Charles Chao

Wallace, this is Charles. I will take the first one. Herman maybe will take your second question. Regarding the end markets, as I said, at the current stage, it’s very difficult and maybe too early for us to make a projection for next year given the reasons I elaborated in my opening remarks and it’s kind of a very cautious sentiment right now and many of our clients are in discussion of their next year’s budget. But budgets really sometimes are subject to their sales projection for next year and so as far as we know that a lot of people are waiting and are discussing, and not too many people have made their decision yet.

So we’ll see probably by the end of this year or maybe in early January, we’ll have a much better idea in terms of the budget situation for our major clients. And one of the events that will be having a lot of attention is the annual CCTV bidding process that’s going to happen by the end of this week and maybe on Friday – that’s 18, that's next week, I think. And that event sometime will be considered as some of the reference point for people to judge the marketing sentiment in China and our understanding is early indication is not too bad at all, and they are actually – have presold some of the inventories and they also raised the price for next year. So we will see, that probably will give us some color in terms of the sentiments for the entire market.

And in terms of specific areas for growth next year and obviously, some of the major categories, we will be still very much focused upon like auto and housing and financial services. And obviously, people have concerns on these industries given the current market situation and we have had a lot of talks with different auto manufacturers in the last couple of weeks and it seems like, although they think the market will be slow, but they still project some very low kind of single-digit growth for next year. And most of these people have indicated they will actually allocate more budget to Internet. That is a good sign for us but, of course, the sales projection can be adjusted in the future if the market gets worse. There’s some risk here.

In terms of housing market and it is not a very good market at all in terms of housing sales but the (inaudible) market seems to be okay and also we are seeing more allocation to online budgets right now. And with out expansion to the more local markets nationwide, we probably will be best prepared to take advantage of any recovery of the sales in housing market next year.

And thirdly about financial service, there are two trends here. One is, with the continuing weakness of the stock market, I think we invest [ph] the revenues or budgets from investment funds have been decreasing significantly in the last couple of quarters and I think we’re not seeing a lot of recoveries in near future from the revenues for investment funds. But on the other hand, with SINA's influential platform in finance and overall media platform, we are attracting more budgets from the big banks and insurance companies which will help to offset that trend – decrease from the investment funds. So I think, the big banks, commercial banks, foreign banks and insurance companies just started to spend more money on Internet in ’08 and the indication is they’re going to spend more money on Internet next year. So that actually worked to our favor also for next year.

And we’re also, of course, very much focused on new areas. It seems like in the current economic conditions, FMCG industries were probably less affected. So next year, we’ll be more focused on this particular industry by providing product and inventories and more advertising formats for this particular industry to grab more budgets for this particular industry. And then we’re also working on some other new verticals like travel and medical service and these areas we historically had very little revenues and we intend to invest in these verticals so that we can get a fair share in these areas.

And finally gaming, online gaming is a big industry and we’re not getting too much share in the online gaming revenues – advertising revenue I’m talking about for online gaming in ’08 and we actually intend to work harder to improve our gaming platform so that we can attract more revenues from online gaming industry next year. And so, there are a lot of areas we are working on and there are a lot of uncertainties. But, as I said, we’re pretty confident that we’ll still be very competitive in the future under same market conditions basically. Hope that answers your question.

Your last question about, what we’ll do if in case that these industries, like auto and housing market, deteriorate more and we actually see shortfalls in these revenues. I think what we’re doing within the company right now is that we’re much more cautious in our cost control and operating expenses control. Due to uncertainties, we’re not expanding our business too much but rather we have more emphasis on the cost control, so that we can, as Herman mentioned, be more efficient in terms of our operations and become more profitable, even if the sales revenue potentially may have the shortfall basically. Hope that answers your question.

Wallace Cheung − Credit Suisse

Yes, thank you.

Herman Yu

With regards to Accounts Receivable Management, I think we talked about this. In terms of AR Management, I think we talked this before. So we have a pretty prudent AR allowance policy in which we look at customers or advertisers depending on their size and also depending on the length of relationship. So you have one extreme like China Mobile, which we are very confident of and we’ll continue to give them credit. On the other extreme, if it’s a new advertiser, if it’s not a very big advertiser and so forth, we’ll ask them to prepay and we’ll recognize revenue on a cash basis. So going forward, with the current economic environment and so forth, this is an area we’re clearly looking at carefully and we will make our judgment on these areas as they come.

Operator

Your next question comes from the line of Eddie Leung with Merrill Lynch. Please proceed with your question.

Eddie Leung − Merrill Lynch

Good morning Charles, Herman and Cathy. Just a couple of quick questions; the first one is could you give us an update on your search business?

Charles Chao

What business? I’m sorry.

Eddie Leung − Merrill Lynch

Search.

Charles Chao

Search business. We actually don’t have too much update on that. We’re still working with Google on web search and then Google also provides excellent [ph] product to us in terms of advertising and the number has been increasing every quarter but not very significantly. And so we’re not seeing too much. I will say the possibility of a significant growth next year, we’ll be still growing with some traffic basically.

Eddie Leung − Merrill Lynch

Got that. My second question is, you guys talked about cost control. So, could you give us an update of your staff plan, say by the end of this year and for next year if possible?

Charles Chao

Are you talking about headcount plan?

Eddie Leung − Merrill Lynch

Yes.

Eddie Leung − Merrill Lynch

We’re actually working. Right now, we’re not hiring too many new people for fourth quarter and we’re doing a lot of optimization of our headcounts. At the current stage, the headcount plan for next year will really depend on our budget process which is in the process right now. And my feeling is that, if the economy continues to be sluggish, we’re not going to hire more people.

Eddie Leung − Merrill Lynch

Got that. My final question is about your wireless portal. Is it possible for you guys to share some of the matrix, for example, like traffic, usage, [ph] etc. for your wireless portal? I know right now your monetization is little but I just want to know whether there is any traction over there.

Charles Chao

In terms of wireless portal, it is one of our focus for future business basically. We’re having very much – investing personnel, content and products for this particular project and so far, I think, this year, our user number more than doubled. I think currently on a daily basis, we have more than 2 million users, maybe 2.5 million users. And more importantly, our users are I think much more valuable than most of our peer companies in this area because a lot of people come to our web sites for content, for news. And so, the demographics for the user base are much more desirable for advertising and we are actually already working with some partners generating some of the mobile revenues here but it’s not significant at this stage.

We’re still in the process of experimenting different advertisement formats and also a mobile portal and I think for next year, we’ll continue to invest more on this particular portal. And the trend in China is that more and more people access Internet through the mobile phone and so we want to take advantage of that opportunity in the future.

Eddie Leung − Merrill Lynch

Thank you very much.

Charles Chao

Thank you, Eddie.

Operator

Your next question comes from the line of Ming Zhao wit SIG. Please proceed with your question.

Ming Zhao − SIG

Thank you for taking my question. Good morning Charles, Herman and Cathy. My first question is, I wonder how much of your advertising revenue is coming through OEs [ph] and the focus on the ad agencies. It seems like there’s a disparity between what they see for the 4Q and what you see for the 4Q. So maybe you could give us some color that will be helpful.

Herman Yu

Well, I think historically, at the beginning of the year, we had about probably 25% and now I think it’s less, probably around 20%, maybe a little bit less from the entire group basically. The other question?

Ming Zhao − SIG

Okay. The second question is, from your talks with the advertising clients, do you notice any feedback, changes between the multinational companies like Intel, Dell and the local companies like China Mobile and China Telecom?

Herman Yu

I don’t want to comment on the specific clients but in terms of multinational versus domestic companies, we see actually more potential from the domestic companies. Multinational companies, as you know, they are not many in China although they are the early adopter companies in China advertising market. But in terms of potential growth, it will be more from the domestic companies. And I think we’ll also see that trend in our own business basically.

Ming Zhao − SIG

Okay. My last question is, maybe this is tough to answer but it’s okay if you don’t answer. I just want to – when the advertising revenue peaked in 3Q, we are going to have the 4Q down sequentially but still decently up year-over-year. And then Q1, we are heading into a seasonally weak quarter. How should we look at Q2 next year? Are we going to see the Q2 revenue back to the Q3 level? Just conceptually not really precisely.

Charlie Chao

It’s a question that’s impossible to answer. But anyway, I think that the normal trend, if you look at our historical trend, the second quarter always will come back very strongly from our first quarter and that sequential trend I think will not change. But in terms of whether for next year we’ll get the Q3 number for this year, I really don’t have any position or basis for that particular comment basically.

Ming Zhao − SIG

Okay, that’s fine. Thank you very much.

Charlie Chao

Thank you.

Operator

Your next question comes from the line of Dick Wei with JP Morgan. Please proceed with your question.

Dick Wei − JP Morgan

Hi, thanks for taking my question. I got a couple of questions. First of all, in terms of the content cost, do you expect any more exclusive content that’s up for bidding over the next one or two years that you could be interested in? And then secondly, it’s also regarding content. I think I saw in the local media that you’re partnering with Mangocity by China Travel for your travel channel. I wonder, going forward, how you would balance between having an in-house feeder of content versus outsource or partnership's content? And then thirdly is, short questions for the real estate segment, how much revenue on the real estate is from the Beijing area? Thanks.

Charles Chao

Maybe you can ask the last question again after I finish the first two.

Dick Wei − JP Morgan

Okay.

Charles Chao

First question about content, right? I think obviously, in the past couple of years, a lot of web sites in China have been competing on exclusive contents and also we’re one of the active competitors in this area. As we’ve said before, a lot of content actually requires significant investments are usually in area of major sporting event, Olympics Games, World Cup, Euro Cup or NBA, these areas and I think that content competition will continue. And in ’09, obviously there’s no major sports event except for these annual sports events for basketball and football which is quite normal for us and we’re going to continue to invest in this area.

But maybe given the past experience, we may not necessarily get into exclusive relationship at any cost, rather we are going to weigh on the return of our investment and the benefit versus the cost, and to make our decision here. And I don’t think there is any major one in 2009. In 2010, there will be World Cup and that content particularly is already for bidding. And so again, I think we will see the cost benefits from that content to make a decision in terms of whether we will bid on it or we’re going to bid on it exclusively or collectively with other web sites.

I think my feeling is the trend is, given the market condition, the kind of competitive landscape in China, it’s more likely people will come up with – think of [ph] alliances for content acquisition for these major sport events and that would be my take going forward.

In terms of other content, I think we routinely acquire contents working with different content partnerships. The one you just mentioned in terms of travel area, it is very normal. We don’t spend any money for these kind of content.

We have, as we’ve said before, more than 2,000 content partners. I would say that 80% of these partners, we don’t pay any money, rather we do a lot of exchange for values. So that would be the content situation. In terms of total content cost, given that we spent a lot of money in ’08 for Olympic Games for other sports event, I don’t see there will be a year-to-year comparison there will be increase for ’09. That would be our current assessment.

And what was your last question, the real estate market in Beijing?

Dick Wei − JP Morgan

Do you mean that content cost is not going to go up year-over-year in 2009?

Charles Chao

Yes, I don’t think total content cost will go up because in ’08, obviously, we spent extra money for Olympic Games.

Dick Wei − JP Morgan

My last question is on the real estate revenue. I guess before you mentioned around 70% was on Beijing. I wonder if there are any changes in this quarter?

Charles Chao

For Q3?

Dick Wei − JP Morgan

Yes.

Charles Chao

I think it’s still close to that number, but I think before it was more than 70% and now I think it is less than 70%.

Operator

Your next question comes from the line of Tian Hou with Pali Capital. Please proceed with your question.

Tian Hou – Pali Capital

Hi, Charles, Herman, Cathy; I have one question. Among your revenues, how much comes from direct sales, how much comes from agencies?

Herman Yu

Well I think that’s a hard question because we said before, we actually sign most of our contents through agencies whether we sell it through direct sales force or agencies. And currently, I think it was due like probably 60% from different agencies. That means agencies are the ones who really do the pitch and do the sales, and about 40% actually were our direct sales force are more involved to getting clients, and then working with different agencies for providing services. So to answer your question, most of the contracts are signed with agencies and I would say 40% of these revenues are more involved with the direct forces.

Tian Hou – Pali Capital

Okay. And just one thing, next time, can we do the call not at the same time with other companies?

Herman Yu

Pardon.

Tian Hou – Pali Capital

I’m just making fun of it, because today, we have at same time two companies making conference. So I had to jump back and forward. I have two phones going on.

Charles Chao

Are you getting lost?

Tian Hou – Pali Capital

It’s okay, yes. That’s all my question. Thank you.

Charles Chao

Thank you.

Operator

Your next question comes from Muvi Lee [ph] with Morgan Stanley. Please proceed with your question.

Muvi Lee – Morgan Stanley

Hello Charles, Herman, and Cathy. Thanks for taking my questions. My first question is regarding to the price increase for advertising services in 2009. Do you plan to raise your advertising price and by how much? Thank you and I have follow-up questions.

Charles Chao

Typically, we raise price every two quarters and we just raised for Q4 and whether we will raise the price again, the next price hike will be in Q2 2009. I mean, I think whether we will raise the price always depend on our market assessment during Q1 basically for the entire ‘09 situation and without surprise, obviously routinely, we raise price every two quarters. And in terms of the magnitude of the price hike, I really cannot comment at this point.

Muvi Lee – Morgan Stanley

I see. For Q4, average, by how much percentage did you raise the price?

Charles Chao

As we said before, it’s always a mixed picture in terms of different inventories in some of the (inaudible) inventories with high demand or whether it’s priced more like 20% to 30%. Some inventories with less demand, less utilization, then we tend to not increase and sometime decrease it, so a mixed picture. If you look overall picture, you get between 10% to 20% based on the rate cut and assuming all the inventories are included, but in reality of course some inventories have high utilization rate and some inventories have very low utilizing rate. So, it’s really a mixed picture basically.

Muvi Lee – Morgan Stanley

I see. My second question is regarding to the margin trend going to the fourth quarter and 2009. Do you see the margin trend recovered after the Olympic Games?

Charles Chao

The margin definitely will recover in Q4 given in that we have not going to spent extra money. The one-time spending on content and marketing for Olympic Games in Q3 will be gone and so you will see budget [ph] improvement in both gross margin for advertising and total operative margin for the company. And in ‘09, I think in terms of the gross margin, operating margin are really depending on the future sales projection which at this point we cannot comment specifically. But assuming that the sales will be growing smoothly, the operating margin should improve basically.

Muvi Lee – Morgan Stanley

I see. Thank you very much.

Charles Chao

Thank you.

Operator

Your next question comes from Vivian Li with Piper Jaffray. Please proceed with your question.

Vivian Li – Piper Jaffray

Hi, good morning Charles, Herman, and Cathy. Congrats on the quarter. Just a follow-up to Charles' comment in the last question. In term of margin strategy going forward, when looking at ‘09 on a relatively basis, will SINA focus more on managing margins given the uncertainty of macro economy or will SINA focus more on expanding to more verticals and gaming and trying to gain market shares? Thank you.

Charles Chao

Well, I think we’ll do both. Our current core businesses will be much more focused on the margin control and to provide better cost control and a better margin for our current business. But I think we’re not going to cut our investment, expansion in new areas if we see good opportunities basically.

Vivian Li – Piper Jaffray

Thank you.

Charles Chao

Thank you.

Operator

Your next question comes from the line of Jason Helfstein with Oppenheimer. Please proceed with your question.

Echo He – Oppenheimer

Hi, this is Echo He for Jason. Just several housekeeping questions. First, based on your comments on the current ad spending [ph] market, can we interpret it like that you are expecting across the board?

Charles Chao

Pardon, I did not get the question.

Echo He – Oppenheimer

I’m just saying, based on your comments on the current market, are you expecting across the board weakness?

Charles Chao

Across the board weakness?

Echo He – Oppenheimer

Across the board.

Charles Chao

Across the board weakness. I think the weakness is, when you say across the board for all industries, but probably it will be more concentrated in certain areas for weakness. But, as I said, that FMCG and online gaming might be somewhat exempted from potential slowdown and less affected by the economy basically.

Echo He – Oppenheimer

Okay. How much of your revenue coming from, what's the percentage I mean, from automobile, real estate, and the financial service?

Charles Chao

It's 52% for those three categories in Q3.

Echo He – Oppenheimer

Okay. In terms of cost reduction, which area, is it marketing, R&D or G&A is the easiest to reduce? I guess sales and marketing?

Charles Chao

I think it’s more, some of the variable cost expenses will be cut and I think that in terms of operating expenses, it will be more focused on probably, I think maybe we’re not going to cut R&D cost, but for other areas we want to have more savings basically.

Operator

Your next question comes from the line of Wendy Huang with RBS. Please proceed with your question.

Wendy Huang – RBS

Hi, thanks for taking my question. Hello?

Charles Chao

Yes?

Wendy Huang – RBS

My first question is regarding your advertising business. In terms of the new advertisers you acquired in second quarter or in third quarter, can you comment on which industries or categories that those new advertisers are coming from and what efforts will you make going forward to retain those new advertisers?

Charles Chao

I think it's more across the board in terms of new advertisers and I don’t remember specifically the industry – maybe FMCG is the areas probably we’ll get more clients, more so than other industry, but it’s pretty much across the board. I think as we always do that we have pretty good retention rate for our customers for advertising and historically and I think we just have to continue to provide good service, good results for these clients, and usually they will keep coming back basically.

Wendy Huang – RBS

Actually, my question is, given that even the online advertising price hiked during the Olympic time, so for those new advertisers who just experiment with the new media during the Olympics, do you see any risk of losing those advertisers when they are tightening their budgeting, the economic slowdown?

Charles Chao

Well, I think –

Wendy Huang – RBS

(inaudible) cost effectiveness, online media.

Charles Chao

I think Olympic is not a very good example here because it’s the inventory that created for Olympic coverage only that we normally don’t have that inventory, and so I think the fact they tried, some of the new clients tried Olympic coverage, some of them actually may not necessarily become our new client because of Olympic games.

So for the ones who become our new clients because of Olympic Games, if they tried and they first time see the power of Internet advertising and promotion, and I think the price will now be the same post-Olympic games for these contents if they have routine campaign and that will be more in line with our other clients in normal business basically.

And so I don’t see too much connection here. I think the Olympic Games really served as education for these clients. Once they see the effectiveness and the power of Internet promotion, they would come back and at which time, they will probably fall on normal term in terms of pricing for normal inventory.

Operator

Your next question comes from Paul Woo [ph] with Nomura. Please proceed with your question.

Paul Woo – Nomura

Yes, one quick question on the traffic. You had mentioned obviously the Olympic traffic was quite high. I was wondering how your overall portal traffic has trended in October post the Olympics.

Charlie Chao

I think usually, even with the Olympic Games, the dip in the month of September and early October – historically we see that trend. I don’t know why. People come back to school and initially they spend less time on Internet in the first two months or first two months and a half basically, and they come back. And so basically, after Olympic Games, we do see a dip in our traffic, but it’s pretty much in line with other web sites as we can see from our monitoring system basically. And so the traffic actually comes back probably in the second half of October basically.

Paul Woo – Nomura

Also, can you talk a little bit about the direct sales? How many clients actually did you have in the third quarter versus the second quarter? Just the total number of customers you have.

Charlie Chao

I don’t have that in front of me. Maybe you can talk to Herman after call.

Herman Yu

Yeah, give me a call. Well, it’s around 700 in China.

Paul Woo – Nomura

All right, thank you very much.

Charlie Chao

Thank you, maybe we’ll have time for one more question.

Cathy Peng

Hello, operator?

Operator

This concludes the Q&A portion of today’s conference call. I will now turn the call back over to Cathy Peng for any closing remarks.

Cathy Peng

Thank you all for joining us today. If you have any follow-up questions, please feel free to contact us. We’ll see you next quarter.

Operator

Thank you for your participation in today’s conference call. This concludes the presentation. You may now disconnect. Good day.

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Source: SINA Corporation Q3 2008 Earnings Call Transcript
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