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Sina Corporation (SINA)

Q2 2006 Earnings Conference Call

August 2, 2006 9:00 pm ET

Executives

Charles Chao - President and CEO

Herman Yu - Acting CFO

Chen Fu - Investor Relations Manager

Analysts

Richard Ji - Morgan Stanley

Lu Sun- Lehman Brothers

Safa Rashtchy – Piper Jaffray

Jason Brueschke - Citigroup

Dick Wei - JP Morgan

Lee Ho – Thomas Weisel Partners

William Bao Bean - Deutsche Bank.

Michael Zhang - ThinkEquity Partners

Frank Shi – CLSA

Presentation

Operator

Good day ladies and gentlemen. Welcome to the Sina second quarter 2006 earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Miss Chen Fu, Investor Relations Manager. Please go ahead, ma'am.

Chen Fu

Thank you, good morning. Welcome to Sina's earnings release for the second quarter 2006. Joining me today are our President and CEO, Charles Chao, and our acting 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 website.

Before the management presentation, I would like to read 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 risk and uncertainty. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements.

Further information regarding these and other risks is included in Sina's annual report on Form 10-K for the year ended December 31, 2005 and its recent quarterly report on Form 10-Q, as well as in other filings with the Securities and Exchange Commission.

Additionally, the non-GAAP and comparable GAAP information are contained in our earnings release, which can be found on our corporate website at http://corp.sina.com. Following management's prepared remarks, we will open the line for a brief Q&A session.

Now, let me turn the call over to our President and CEO, Charles Chao.

Charles Chao

Thank you, Fu Chen. Good morning everyone. Welcome to Sina's 2006 Second Quarter earnings conference call. I am very pleased to report that we delivered a great quarter by many measures. It was a quarter of superior execution. Our results show strong growth in web traffic, significant expansion of the advertiser base, and a very strong pick-up in advertising revenues. Even our much-troubled mobile business has shown signs of stabilization, after a few quarters of sequential decline.

It looks like that our strategy of refocusing the efforts on what we have been doing in the best, which is building the best Internet brand and content and offering the best and most effective advertising services to our customers, has continued to pay off. Based on the most current half-year survey results released by CNH a couple weeks ago, China Internet users grew by 10% to 123 million in the first half of 2006. Sina's page view traffic grew by 37% in the same period excluding, the impact of the [word counts].

Our strong traffic growth together with the hot China economy laid a good foundation for continued advertising revenue growth.

For a long time, our overall revenue growth has been overshadowed by a large but uncertain mobile business, despite the fact that we have been consistently growing our advertising revenues at a fast pace. I'm quite pleased to see that in the second quarter for the first time in the last three-and-a-half years, our advertising revenues surpassed our mobile revenues by a big margin and accounted for 55% of our total revenues. More importantly, we achieved this change of revenue mix by a strong advertising revenue growth and not a decrease of our mobile revenues. We believe our revenue mix will further improve as we continue to refocus our efforts on our Internet business.

Now let me talk about the business highlights. For the second quarter, Sina reported total revenues of $53.7 million, up 16% year-over-year and way above our original guidance of between $47.5 million and $49.5 million.

Advertising revenues for the second quarter were $29.5 million, up 45% year-over-year and 33% quarter-over-quarter reaching the high end of our original guidance by almost 10% and well exceeding the consensus estimates. This sequential growth rate of 33% is the highest in Sina's history, a remarkable achievement given our high revenue base in advertising. Again, I would like to stress that our advertising revenues included mainly branding advertising and do not include search revenues.

Excluding international markets, advertising revenues from our China operations grew 47% year-over-year and 35% quarter-over-quarter. For the first half of 2006, advertising revenues grew by 39% year-over-year, and advertising revenues from China operations grew by 42% year-over-year.

There is no question that we are taking market share from our competition in China online branding and advertising markets as we generated 50% more revenues in branding and advertising than our closest competitor in the second quarter.

As mentioned earlier, advertising revenues accounted for 55% of total revenues for second quarter as compared to 44% in the same period last year and 47% in the previous quarter. The 2006 FIFA World Cup event served as a major catalyst for the strong advertising revenue growth for the second quarter. We launched our World Cup website at the beginning of March with exclusive content partnerships with major news agencies such as Associated Press, AFP, Reuters, DPA and the various leading Chinese media companies. We also supplemented our already abundant content sources with various video and fresh content, as well as computer animated [graphics].

Our hugely popular blog service also played an important part in our integrated multimedia World Cup coverage, with approximately 3 million blog postings relating to World Cup. Overall, our World Cup coverage turned out to be another huge success, and continued Sina's position as the leader in online sports coverage.

From all of the third-party reports and surveys we obtained, Sina's World Cup site was ranked the number one destination for Chinese Internet users for World Cup events. According to AC Nielsen Net Ratings, Sina's World Cup sites hit a new record in online sports event coverage in China, by attracting 57.6 million unique visitors during events. The previous record was also set by Sina during the 2004 Olympic Games, when 28 million unique visitors visited our Olympic site. This was also according to the figure provided by AC Nielsen.

Our successful coverage of World Cup attracted over 90 sponsors and advertisers, to our World Cup site, also a record number for any single event we have experienced. Our top sponsors included China Mobile, Nike, Coca-Cola, IBM, Samsung and the various top car makers. Our outstanding performance during the World Cup demonstrated superior execution ability of both our content and advertising sales team, which gives us full confidence in continuing outperforming our competitors in future sports marketing events, including the 2008 Beijing Olympic Games.

Of course, the World Cup is not the only catalyst for advertising growth in the second quarter. We clearly see a very good market for advertising overall in China, and saw an acceleration of adoption of online advertising in the China market, with a significant increase in our advertiser base.

For the second quarter, total number of advertisers reached 633, as compared to 515 in the same period of last year, and 519 in the previous quarter. For the second quarter, automobile, real estate, and information technology continued to be the three largest contributors for our online advertising revenues. Combined, these three categories accounted for approximately 15% of our total advertising revenues for the second quarter. Communications industry and [SMCG] also contributed significantly to our total advertising revenues in the second quarter.

As I mentioned at the beginning, we continue to invest in content to further solidify our status as the leading Internet portal in China. Our strategy has been focusing on securing more exclusive premium content, especially in the areas of sports and entertainment, as well as maximizing user-generated content.

In April, we became the strategic Internet portal partner for the three most popular reality TV shows in China, including Supergirl, Superboy and [Gym China]. We have also secured exclusive video rights for most of these programs. All these three reality shows have received tremendous nationwide attention, which in turn, brought in more traffic to our website.

In our effort to maximize user-generated content, we continued to invest in our blog service during the second quarter. Sina blog service continued its phenomenal success in the second quarter where its traffic doubled again in the last three months. We've rolled out versions 3.0 of our blog service at the beginning of July, and added functions such as interest circles, blog search, mobile blog service, and automatic links.

To date, there are approximately 20,000 interest circles registered. In the last week of July, Sina blog attracted 2.4 million users, and there was 250,000 articles and 400,000 comments posting on a daily basis, making it the largest interactive community for user-generated content in China.

Sina Blog is increasingly becoming a national phenomenon in China with over 600 traditional media coverage on a monthly basis. It is also becoming powerful for star making with more and more grassroots bloggers become national celebrities. With current scale and the popularity of our blog service, we believe we have laid a good foundation for our future interactive community which in turn will drive our traffic and revenue growth over the long term.

Now let me talk about revenue guidance for the second half of 2006. We believe China's overall advertising market is doing very well and the online advertising market is accelerating. Given our strong performance in the first half of the year, we're upgrading our full year advertising growth rate from 25% to 30%, to 35% to 38%.

Turning to our mobile value-added service. We actually did quite well in our mobile value-added service business in the second quarter with minor revenue declines and stabilized gross margins. The mobile value-added service revenues amounted to $22.4 million for the second quarter, representing a 1% decline year-over-year and quarter-over-quarter, beating our internal expectations. Our better than expected results where achieved through improving our operating efficiency and diversifying the promotion channels for our mobile product.

The revenues for SMS products were largely flat between Q2 and Q1, and amounted to $16.1 million in the second quarter. Revenues for our non-SMS service were $6.4 million for second quarter, representing 1% decline from the first quarter with modest increases in MMS and WAP, and the K Java games, and the modest declines in IVR and ringback tones.

In early July, China Mobile announced a series of new operating policies which we informed the market in our press release dated July 7. As we explained in that press release, these new policies -- which included longer free trial periods for monthly subscription, double monthly reminders for new monthly subscribers, and others -- will have a significant negative impact on our mobile business relating to a monthly subscription model.

In essence, these new policies if strictly enforced, will make it very difficult for us to find new monthly subscribers via our existing promotion channels. We are currently exploring new promotion channels by enhancing our partnership with traditional media and the handset manufacturers on a revenue share model.

For the second quarter we had approximately 67% or $15 million of mobile revenues generated from monthly subscription business with China mobile. This portion of mobile revenues will be affected under the newly announced operating policies. Our current estimate is that revenues from monthly subscription business with China Mobile will be reduced by $3 million to $4 million each quarter in Q3 and Q4.

However, the reduction in China Mobile subscription revenue is being partially offset by our recent strong pick up in IVR business and to a lesser extent by our SMS revenues from China Unicom. Sina has IVR service set up in most provinces with all four major mobile and telecom operators in China including China Mobile, China Unicom, China Telecom and China Netcom.

Our recent marketing campaigns for our IVR service proved to be very attractive and resulted in significant increase in IVR revenues in the month of July. In fact, based on our preliminary internal results our total mobile revenues did not drop in July compared to June as a result of the strong performance from IVR service. We are not sure, however, whether this IVR momentum will last and how long it will last.

Our current non-advertising revenues guidance for Q3 implies a sequential decline in the middle teens for mobile-related revenues. This is assuming no additional new policy will be issued by China Mobile or China Unicom. We'll keep monitoring these developments and will inform the market if there are any changes to our operating environment for our mobile service.

In general we're not positive on the mobile service in the current business model. There are possibilities that the mobile operators will continue to issue new policies which may be detrimental to our mobile service. In the near term we will be limiting our investment in the mobile business and focusing on improving the profitability by reducing our fixed costs. However, we continue to believe that it is important for Sina to maintain a strong presence in the wireless business in anticipation of the launch of 3G mobile network in China.

Although there is uncertainty in terms of the future mobile Internet operating model we remain positive that we will be able to leverage our Internet product strengths in the mobile Internet area. With that I now turn to Herman Yu, our Acting CFO for financial highlights.

Herman Yu

Thank you, Charles and thank you all for joining our conference today. Charles has reviewed our revenue results rather extensively. Let me spend a little time discussing Sina's other financial highlights for this quarter. Pursuant to FAS 123 R we began to include stock option compensation in our revenues and operating expenses starting January 1st, 2006.

Our discussion will use non-GAAP measures which exclude stock-based compensation as well as other non-core operating items. We believe using non-GAAP measures enhance users overall understanding of Sina operating results and allow for better historical comparisons. For a further discussion of our non-GAAP measures and items that are excluded please refer to our earnings release for the quarter.

Let me begin our financial highlight discussions starting with gross margins. Sina's gross margin for the second quarter of 2006 was 63% compared to 69% last year and 61% last quarter. Our advertising gross margin in the second quarter was 65% compared to 68% last year and 63% last quarter.

Excluding the $350,000 in stock-based compensation from each quarter, non-GAAP advertising gross margin for the quarter would have been 66% compared to 64% last quarter. The sequential margin improvement was primarily due to our strong revenue growth in the current quarter.

Gross margin for our wireless business was approximately 60% in the current quarter, down from 67% last year and increased slightly from 59% from the previous quarter. The year-over-year decline was mainly due to increased transmission costs paid to mobile operators and increased costs for content acquisition. As we indicated previously, we anticipate a continual increase in operating content costs and as such a gradual erosion on wireless gross margins over time.

Turning to operating expenses. Our operating expenses for the quarter totaled $26.4 million, compared to $20.4 million last year and $22 million last quarter. Included in our operating expenses this quarter is $2.7 million in staff compensation compared to $1.2 million last quarter. Of the $1.5 million sequential increase in stock-based compensation, $1.2 million resulted from option shares granted to directors this quarter, which had immediate vesting.

Our non-GAAP operating expenses which exclude stock-based compensation and amortization of intangible assets for this quarter was $23.2 million, an increase of 20% from last year and 14% from last quarter.

Sales and marketing expenditures were notably higher this quarter compared to last quarter and last year. The annual and sequential increases in sales and marketing can be mostly attributed to the promotional effort on our wealth of related content in the current quarter and to a lesser extent, increased marketing spending on our [inaudible].

Turning to operating margin, our non-GAAP operating margin for the quarter was 21%, compared to 27% last year and 18% last quarter.

Turning to net income, our net income for the quarter was $10.4 million compared to $10 million last year and $7 million last quarter. Non-GAAP net income, which excludes a $2 million gain related to the sale of our interest in NcSoft a joint venture on online games, other non-GAAP items was $12.3 million, compared to $12.5 million last year and $9.6 million last quarter.

Turning to our balance sheet. As of June 30th, 2006, cash, cash equivalents and investments in marketable securities balance was $312.5 million, compared to $304.4 million last quarter. Our DSO for the quarter was 67 days, compared to 66 days last quarter.

Turning to Q3 business outlook. For the third quarter of 2006, we are targeting net revenues to be between $51 million and $54 million. We are targeting our advertising revenue to be between $31 million and 432 million. As Charles mentioned, we are increasing our 2006 year-over-year advertising revenue growth target to between 35% and 38%. Our previous target was from 25% to 30%.

On the non-advertising side, we are expecting revenues between $20 million and $22 million. The wider range in our non-advertising target is to reflect the uncertainty that we are seeing brought about by the changes in mass subscription policy that we have disclosed in our press release.

Stock-based compensation for the third and fourth quarter of 2006 are expected to be approximately $2.7 million and $2.4 million respectively, which excludes

any new shares that may be granted. This brings us to the end of our presentation for today.

We are now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Richard Ji - Morgan Stanley.

Richard Ji - Morgan Stanley

Hey, Charles and Herman; it's a great quarter.

Charles Chao

Hey, Richard. How are you?

Richard Ji - Morgan Stanley

I have two questions. One is regarding online advertising, the other is mobile DAS. Regarding the online advertising revenue, clearly you showed record growth this quarter in your history. I just wondered how recurring would this advertising revenue be, especially given the impact from World Cup?

Charles Chao

I think that that's a good question, Richard. I believe the World Cup has good impact on our strong advertising growth this quarter and more importantly, I think we see a very good Internet market in China and a very good advertising market in China. We have seen a very strong demand from our customers for the online advertisements.

So to answer your question, I mean, World Cup did help to generate a lot of traffic and a lot related to revenues, but I believe that most of these customers will have the budget to stay anyway. They just choose to spend more money on the World Cup this particular quarter. So I think most of these revenues will be recurring and we see strong momentum going into Q3, as you can see from our guidance. As I said in my presentation just now, that the overall market is doing quite well in China.

Richard Ji - Morgan Stanley

Very good. The second question is regarding mobile DAS. Clearly, it didn't start to show as you guided. I mean, it showed a middle-teen percentage of sequential decline, which has been our expectation. Can you also give us better color on the timetable you could see for your mobile DAS to recover? How long will that take?

Charles Chao

Well I think that's a more difficult question, Richard. I did mention that we implied a mid-teen percentage decline in the Q3 compared to Q2. There are two reasons behind it. First, I think you know there are a lot of new policies being implemented right now that are being rolled out from province to province. We have not seen the full impact of these policies yet. So I think sequentially you're not going to see a full impact from these new policies in Q3.

Secondly, I mean we're also taking our initiative to grow our own revenues so other measures that will not be affected by the new policies. And so one I mentioned in our IVR service, which has been doing particularly well in the month of July and we also see good momentum in August. So these factors adding together will help us to reduce our net impact from these new policies, so the decline in Q3 is not as significant as we previously had thought.

But at this point we don't have enough visibility going into Q4. Because we have not yet seen a full impact on these new policies. Our general assessment is that Q4 is going to be even worse than Q3 when we see the full impact on these policies.

On the other hand, as I mention just now, I'm not quite sure how long our momentum of IVR service would continue. If it continues to grow, that's great, and at least we'll have some offset for these declines from the new policies. At this point, I just don't enough visibility.

Our general sense is that it is going to get worse in Q4 and we'll probably have a much better idea after we finish Q4 and go into Q1.

Operator

Your next question comes from the line Lu Sun with Lehman Brothers. Please proceed.

Lu Sun- Lehman Brothers

Good morning Charles and congratulations on a good quarter. I have two questions as well. The first one is actually more general and more on overall strategy of Sina. You mentioned on the last call that the board and all the management team are considering some restructuring efforts, especially for the non-core business and those efforts may have some impact on the bottom line. I noticed that you haven't given out any bottom line guidance for the third quarter as well, could you talk a little bit about these efforts?

Second one is for your IVR business. Can you let us know what are the new contents that are being promoted and how? Thank you.

Herman Yu

The first question is fairly easy, and it is a quick answer in the way we're studying the process of reviewing the strategic options relating to these businesses. So we have not come to a conclusion at this point, so this process will continue in Q3 and I fully expect that we will have some conclusion by the end of the Q3. At which point we'll update you on the next conference call.

The second question regarding IVR and basically most of our IVR service is being promoted really through music products like the ringtones and ringback tones, these types of products. And so we're basically using IVR service as a distribution channel for our music products, basically. So we are still utilizing TV advertising for IVR service, but I think the difference right now is that, since a lot of people stopped using TV advertising for promoting their monthly subscription, and so the competition for the TV time is significantly reduced. So we can get a much better rate for our TV advertising right now. The return on these IVR promotions actually is pretty good, based on the numbers I have seen, for the last month.

The only thing I am not clear is that whether this momentum will continue, and most likely I think that we're going to see a good quarter for IVR service.

Lu Sun- Lehman Brothers

Just to be clear for the IVR service, are they pretty much on a per view basis or are on a subscription basis?

Herman Yu

IVR service is based on a usage basis so it's based on the number of minutes used on a call. And so it's not a subscription base. It's being charged as you use the service so that's why it's not being impacted by the new policies.

Lu Sun- Lehman Brothers

Okay thanks a lot.

Operator

Your next question comes from the line of Safa Rashtchy with Piper Jaffray. Please proceed.

Safa Rashtchy – Piper Jaffray

Good morning Charles and everyone, and congratulations on a great quarter.

Charles Chao

Thanks Safa.

Safa Rashtchy- Piper Jaffray

I want to focus on advertising and you had a very, very strong performance and yet you mentioned that [inaudible] can't really have all the credit for helping you with this.

So two parts to my question, one is this kind of growth would clearly suggest relatively major market share gains if you're growing at 45% and the competition is growing at 30 some percent. We haven't seen this in the past. How do you explain this happening in one quarter?

Charles Chao

I'm not sure Safa. I think in terms of our advertising growth with our competitor, I think we have stronger growth year-over-year in the last five quarters with the exception in Q1 of 2006. So I think this is a continuing process. Basically we are taking market share away from our major competitor in the market and I think Q1 is just an exceptional quarter in this process. Overall we believe we are much more competitive in this brand advertising marketing in China, with the best content team and we also right now have the best sales team in this market. With all the sales systems being built up for a good foundation for our continuing scalable sales effort.

So I think that this is a result of our ongoing efforts to include our content into our sales ability in the market. I think this quarter you're right, is exceptional in terms of the gap I mean we have created. I mean I think this has to do with a much better execution of our team in both content and ourselves with regard to the work up and so I think these kind of efforts will continue in the future and hopefully we'll gain more market share going forward.

Safa Rashtchy- Piper Jaffray

The second part of the question is having grown about 45% this quarter, your guidance of 38% either seems very conservative or suggests that there was a nice contribution from World Cup. How should we look at that? If you're growing this fast and you're gaining market share that should help you grow at least as fast and maybe faster?

Charles Chao

Well I think obviously regard to the World Cup the event happened in June and July so it covered both quarters and based on the number of days you can count from June 9th to July 9th, so we had possibly two-thirds or 60% of our revenues from what has been allocated in Q2 and 40% being allocated to Q3. That's why the benefit from World Cup in Q3 is less compared to Q2. So that showed a slower year-to-year growth. I think that's financial. Yes.

Safa Rashtchy- Piper Jaffray

And then last question if I may on margins. Your advertising margins were substantially higher last year; last quarter, Q1, they came down. And they did improve somewhat this quarter, but not quite as much, which was a bit surprising to me, given the huge revenue growth. Can you tell us what kind of leverage you would expect to have on the advertising margins going forward?

Charles Chao

Well I think you're right. I mean I think we increased our margin by 2% to 3% sequentially in Q2 compared to Q1 and although it's a much higher revenue base. Basically we have increased our bandwidth cost as well as the content cost in anticipation for World Cup strong traffic growth and also the content acquired exclusively for World Cup events. I think going forward that we probably will see the similar margin for our advertising business as we anticipate -- and I talked before many times that we intend to increase our content costs going forward to secure more premium content on an exclusive basis. Also adding more capacity for our web traffic by increasing bandwidth costs.

I mentioned last quarter that there is an increase in the unit price of bandwidth costs in China. So this trend is going to continue for a while as we continue growing traffic. So I basically believe that the advertising margin will maintain at a similar level in the next few quarters.

Safa Rashtchy- Piper Jaffray

Okay. Thanks. Great quarter.

Charles Chao

Thank you.

Operator

And your next question comes from the line of Jason Brueschke - Citigroup. Please proceed.

Jason Brueschke - Citigroup

Thank you. Charles, let me add my congratulations to your first quarter as CEO as well.

Charles Chao

Thank you, Jason.

Jason Brueschke - Citigroup

Charles, I'm going to maybe follow-up on a question that Lu Sun did and that is about the IVR revenue. When I hear that IVR is doing better because there's less competition on television to promote the subscription services, to me it seems it can go one of two ways. One is this could be a temporary lull and people kind of are frozen, let's say, by these new policies and don't know how to react; in which case the strong results from Sina. They may mimic you and therefore that would be maybe a fleeting advantage or maybe not as strong going forward as you've seen in July and August.

On the other hand, one of the things that we've all been hoping for is that China Mobile and MII will eventually clean up the wireless value-added services industry, take a lot of the fly-by-night smaller private companies out of the market. If it's the latter, then the strength you're seeing from IVR and from your wireless business suggests you would have a much stronger future going forward.

Based upon what you know and what you see and what you think, which one are we more likely see? Is it going to be some more temporary or are we looking at a more fundamental improvement in the overall industry?

Charles Chao

Well I think, Jason, at this point, it's very difficult to answer your question. Actually, I mentioned in the presentation, that I'm not quite sure whether this IVR momentum will last and how long it will last. Having said that, I don't believe it's a similar situation where you have seen in the TV promotion for the SMS service. The difference really is that there's probably thousands of SMS companies in China who have the license and who can do the TV-direct advertising.

But in terms of IVR license and especially the IVR license with national access, I don't think there's many – and my understanding is that companies with national IVR service access, the amount of companies is about 20 to 30.

And among them we are one of the very few companies who have national access with all four major operators including China Mobile, China Unicom, China Telecom, China Netcom. So we're not going to see that many competitors, I mean, in this particular space for the reasons just mentioned. So from that regard, I think that we are in a more comfortable situation than before in terms of getting the reasonable TV place for promoting our service.

I think over the long term, I think it's a multi-question not relating to IVR, it's relating to the entire mobile service. What direction the mobile operator is heading and what is the overall environment it's going to create after the clean up? There's no question that this clean up will kill a lot of smaller SP's in China market. On the other hand, is also going to hurt the big SP's like us.

It's not very clear, I mean, the China Mobile is just increasing the small SP's or they are moving towards a model level, they will actually increase their presence in the value chain by acting as the SP itself and so that they will limit the growth and the opportunity for other SP's in the China SP market.

So if that's the trend we're heading to, then we're probably going to see that we're going to have a more difficult environment to operate. Although it's a much cleaner environment but we may end up with lower margin and even lower revenues after the clean up.

Jason Brueschke - Citigroup

Thank you. Let me maybe switch to a separate subject. You've had very strong web traffic and I think results from your movement into the blogs space, you also mentioned that believe you now have the largest online community of this type in China. Can you discuss where you are in the monetization of that community? Both in the current quarter and say near term? Could you maybe comment specifically on the role or the necessity, whether it is a necessity to have PTM based pricing in China to really effectively not only, we'll say monetize your web 2.0 type properties but maybe even some of your un-monetized current web 1.0 inventories you have? Thanks.

Charles Chao

Yes I think we have a very successful blog service product in China right now. I have been thinking about modernization of the community service in the last six months and the more I think about it I come to the conclusion that we should not rush into the modernization of the community at this point, and if we look back in the entire Internet history, I don't think any company will be able to make too much money if they do not create a huge scale in a particular product, whether it was 1.0 whether it is search, or e-commerce platform and so on and so forth.

So I think the explosive growth of our blog service at least demonstrates there's a strong demand for this kind of community for user-generated content and also for interaction. The trend about Web 2.0 is about interactive and personalization. So I think this demand will drive the traffic up.

My own assessment is that eventually the monetization will come from the personalized advertising service and it's going to be very different from the typical advertising we're doing, whether this is based on a time based or a CPM based. It's going to be very different from what we have seen but it's going to take some time to develop a model.

I have a strong belief that eventually when we have a very big scale of community we will be able to monetize through advertising, but it will be a very different system. So that's my answer to your question about modernization.

So in short, we're not in a hurry to monetize it. We're more focusing on building the community to become a large scale product. Having said that it's not like we're not getting any benefit on the traffic growth from the blog. If you recall I mentioned early in my conference call that we have seen strong growth in our traffic overall excluding of the effect of World Cup and we actually see very good pick up in our front page traffic and our news traffic and other prime channel traffic in the first six months of this year.

I think it is somehow related, I mean at least to a certain degree related to our popular blog service which is allowing more users to our website and indirectly benefit the traffic channels so we'll be able to monetize our other channels, our prime channels better. With more users will be able to raise our price better and we'll have more room to raise our price so on and so forth. So indirectly it will benefit our entire website and so benefit our advertising business. This is what I have seen so far, basically.

Jason Brueschke - Citigroup

Thank you Charles and again congratulations.

Charles Chao

Thank you, Jason.

Operator

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

Dick Wei - JP Morgan

Good morning, Charles and my congratulations on the quarter.

Charles Chao

Thanks.

Dick Wei - JP Morgan

Yes I have two questions, the first one is more general questions. I wonder for your content investment some of the exclusive content you're talking about, what is the main area or what are the verticals that you plan to put those investments in, and are those areas that you expect to see better monetization?

Charles Chao

You are talking about the premium content I just mentioned, right?

Dick Wei - JP Morgan

Right.

Charles Chao

I think, we have always been adopting a strategy that we want to secure as much as much premium content as possible, and we actually talked about that before, that we work with over 2,000 content partners in China. Some of these we pay, some of these we don't pay, and we pay for the content we absolutely need. Premium value in the market.

The trend right now in the market is that there's more competition. I think, we have adopted much earlier, and there are a lot of followers in the market these days for the value of the premium content, and so the competition drives up the cost of this content these days. Especially I think we have seen a strong pick up in the content costs for some premium sports event, and also some premium entertainment content.

W we'll be working very closely with content planners to get the best content at a reasonable price. I think overall, with the content cost increase, there's no question about that. I do believe that that's why I said that our gross margin for advertising probably will remain at the current level. I think, a big reason is because of the content cost increase, actually.

Dick Wei - JP Morgan

All right great. What do publishers spend on the content? Do you look at usually, the gross margin line, or the bottom line, or how do you manage that?

Charles Chao

Well that's a very difficult question. It depends. I can tell you, I mean, some of the content we acquire is for strategic purpose that will increase our brand recognition, and that will help our overall strategic position, and we will probably do that for strategic reasons. Some of the content we acquire based on revenue share model for a particular event, or whatever. Then that will be purely based on our assessment, in terms of how much the return, how much advertising dollars we can get for a particular content. So it really depends. It's hard to single out one particular criteria that we can follow. But of course we'll look at gross margin on an overall basis to the content costs. But on an individual content basis, it is different.

Dick Wei - JP Morgan

Great, thanks a lot.

Charles Chao

Thanks Dick.

Operator

Your next question comes from the line of Lee Ho – Thomas Weisel Partners. Please proceed.

Lee Ho – Thomas Weisel Partners

Hi good morning, Charles. Congratulations on a very strong quarter.

Charles Chao

Thanks Lee.

Lee Ho – Thomas Weisel Partners

I have a question regarding your wireless revenue as well. Just on the IVR revenue, how much revenue exactly have you generated from the product category? What is your underlining assumption for Q3 and Q4, if you will?

Charles Chao

Underlying assumption for what? For mobile revenue?

Lee Ho – Thomas Weisel Partners

For the sequential growth from the IVR revenue. Or in another word, including the expected pick up in IVR, what is your underlying assumption for the overall product category?

Charles Chao

Well, I think we generate about $2 million IVR revenue last quarter and so, as I mentioned, we saw a strong pick up this quarter in the month of July and if this continues, we'll look at least double or more than double our IVR revenue if not triple our IVR revenue this quarter. So that's the foundation for the assumption that although we expect that revenue from our subscription-based service will be decreased by $3 million to $4 million this quarter, but they will be partially offset by a pick up of IVR revenue and of course, there could be other uncertainties here. So overall we believe that we're looking at a decline of mid-teens in Q3 sequentially from Q2.

But in Q4, as I just talked about, I don't think I have enough base to really see how the revenue trend will go and depending on a lot of factors, how severe the negative impact the new policy will bring to us after these new policies have been fully implemented and how strong our IVR revenue will grow and how strong our usage based product will grow.

These factors, I mean, I think change quite a bit. I don't have enough base for doing a forecast. But my general feeling is that Q4 is going to be worse than Q3 because we'll have the full impact from these new policies.

Lee Ho – Thomas Weisel Partners

That's very helpful. Thank you very much. And also I have a quick follow-up. On the expense side, you mentioned you that you're thinking about scaling down the fixed costs near term, but still will be spending on the offline channel promotion for wireless as well as OEM. So on the operating expenses side, how should we think about the trends going forward for the next few quarters?

Charles Chao

Well I think it is a mix of many, many factors for operating in the margin for wireless service. What I meant is if you recall that we talked about before a lot of expenses and costs fold into wireless service are actually variable cost and variable expenses, which primarily relate the revenue share with mobile operator content costs based on revenue and also the marketing costs for promotion.

So if the revenue decreased, in theory, a lot of these variable costs, variable expenses will also decrease. The problem is with the fixed costs, with a lower revenue base and if we maintain the same fixed costs, that means we're going to have a lower profit margin and lower profit amount going forward.

That's why I mentioned that we're trying to reduce our fixed costs. We [inaudible] our headcount in terms of our personal spending for mobile units, basically. We can minimize our exposure if we do experience a further decline in wireless revenue.

Lee Ho – Thomas Weisel Partners

Great, thanks a lot. And congratulations again.

Charles Chao

Thanks.

Operator

And your next question comes from the line of William Bao Bean - Deutsche Bank. Please proceed.

William Bao Bean - Deutsche Bank

Hi, thanks. Just wondering whether you can give us a breakdown for the other wireless services in Q2, WAP, and MMS, to add any color back and then give us some color on the outlook for Q3 there?

Herman Yu

Can you please repeat the question?

William Bao Bean - Deutsche Bank

If you could give us the revenue breakdown for wireless WAP and MMS Java and ringback in second quarter? Then give us some color on the outlook by segment for Q3?

Herman Yu

Ringback is about 600K, MMS is about 1.1, WAP is about 1.8 and games is less than a million.

William Bao Bean - Deutsche Bank

Any color on Q3?

Charles Chao

For Q3 I think it is more difficult to give you a breakdown of the categories. What I can tell you is that SMS and MMS and part of WAP service will decline for sure. Just because majority of these services are subscription related, and so you are going to see it pick up in IVR. We'll also see some pickup in the ringback tones and the K Java so, overall I think you're going to see that kind of trend. But it is very difficult to give you a breakdown.

William Bao Bean - Deutsche Bank

Second question is, could you give us a sense of the breakdown between your wireless revenue, China Mobile versus Unicom? And for IVR on China Mobile, is that on your platform or on their platform?

Charles Chao

For the IVR service, with China Mobile's own platform. With others, with different operators platform basically. What was the first question, I'm sorry?

William Bao Bean - Deutsche Bank

Just the wireless breakdown. How much is on China Mobile versus the other operators?

Charles Chao

I think historically we saw 10% to 15% from Unicom, but I think in Q2 we saw pickup from Unicom service and if I'm correct, it is reaching 15% to 20% basically. We did not actually see too much impact on Unicom, although they also adopt some new policies, but we have not seen too much impact at this point. We actually believe that our revenue from our Unicom will grow this quarter.

William Bao Bean - Deutsche Bank

Thanks a lot guys.

Operator

And your next question comes from the line of Michael Zhang - ThinkEquity Partners. Please proceed.

Michael Zhang - ThinkEquity Partners

Hey Charles and Herman. Good morning.

Herman Yu

Good morning, Michael.

Michael Zhang - ThinkEquity Partners

Traffic growth during the World Cup was incredible. I don't know if you guys have tracked the revenue for the event? In other words, what was the incremental revenue from the World Cup?

Herman Yu

You mean the traffic or revenue?

Michael Zhang - ThinkEquity Partners

Revenue?

Charles Chao

What do you mean by incremental revenue?

Michael Zhang - ThinkEquity Partners

Incremental means with and without basically? Without this event?

Charles Chao

I think that is really difficult to breakdown because as we discussed earlier on, it is very difficult to say that with or without World Cup, what a particular advertiser will spend on your website. As I mentioned, most of the advertisers will spend money anyway, in Q2. But they seem to choose to allocate more budget to the World Cup. So there's a substantial overlapping in between. I'm not sure you can do a calculation saying that with or without a World Cup, how much you're going to spend.

But we do see a very strong revenue from World Cup sites. I mean that's for sure at that particular site. We probably had about $8 million U.S. gross revenue for the entire site, which covered both quarters in Q1 and Q3. I tend not to use incremental revenue concepts here because I don't think we can figure that out.

But as I mentioned earlier on that most of these customers are recurring advertisers. I mentioned all these names in the conference, like China Mobile, Nike, Coca-Cola, IBM, Samsung. I mean these are the top sponsors of the World Cup. They have also been some of our top customers for our advertising business for a long time. So they would have spent money anyway, they chose to allocate more budget to the World Cup for this particular quarter and so a lot of these revenues will be recurring revenue going forward.

Does that answer your question?

Michael Zhang - ThinkEquity Partners

Thank you. Yes. Then there's a question about the balance sheet and I saw the accounts receivable went up about $10 million in the quarter. Was that related to the advertising revenue or non-advertising revenue, and what is the status as of now?

Herman Yu

Most of the AR increases during the quarter had to do with the World Cup, advertising revenue increased during the quarter. If you look at DSO, we are basically the same with last quarter. So it's purely the increase in revenue.

Charles Chao

So in other words, related to the advertising business, just because we booked more revenues in the month of June, so it's more like back-end loaded for the quarter. But on an average DSO basis, actually did not change that much. So we do not expect a problem here in collecting these receivables.

Michael Zhang - ThinkEquity Partners

You're not giving out the wireless part of the revenue guidance. The existing users' notification just started yesterday. I don't know what kind of assumptions you would use when you give out the guidance. How many customers do you expect to cancel if they receive the notification?

Charles Chao

I think the notification process has started in a couple of provinces already. It's a gradual process being rolled out gradually at each province level. So far we've got very mixed results and at one province in the month of July, we see probably under 10% incremental churn rate and because it's a single province I really cannot use this as a benchmark to judge our overall cancellation rate with this new policy is being fully implemented.

So as I said because this process will be gradually implemented the revenue impact will not be a full impact in this quarter and we already have half of the revenue booked for this quarter based on the system so I think that the true impact will be really seen in the next quarter.

Michael Zhang - ThinkEquity Partners

Okay thank you very much.

Herman Yu

Okay thanks Mike. We have time for one more question now.

Operator

Your next question comes from the line of Frank Shi with CLSA. Please proceed.

Frank Shi - CLSA

Hi good morning guys. Given the strong demand for your enterprise and service are you planning to raise the price again, and if so, how much? And also given the demand and measures by the government for the Chinese real estate market do you see any impact on the advertising revenue from real estate? Thank you.

Charles Chao

We do not have a plan to increase our advertising rate in Q3. As I talked before that we pretty much do a price hike every six months. We did one in Q2. So we plan to do another one in Q4. That has been the pattern we followed in the last year-and-a-half. So that's why you're going to see a high sequential growth in Q2 and Q4 and lower sequential growth in Q1 and Q3.

But at this point we have no concrete plan in terms of exactly how much price we're going to raise in Q4. It's purely on our existing calculations, based on a lot of factors especially the utilization of our inventory and the sell through rate of our inventory of a particular location.

The second question the recent cool down of the market, I think we see some impact here. I mean that our asset revenue is not growing as fast as we expected. But overall I think we're not going to foresee a big problem in the second half of the year. As we talked about before that, in the more difficult times the advertisers for real estate tend to shift their budget to more efficient media and Internet has definitely proven to be more efficient.

Sina's user base is probably more high end than anybody else so it's a very good time for real estate advertising and it's proven to be very effective. So I think even though the overall market is getting worse then we probably will maintain our momentum by getting more market share especially from traditional media in this particular sector. I hope that answers your question.

Frank Shi - CLSA

Yes it did. Okay thank you.

Charles Chao

Thank you, Frank.

Chen Fu

Thank you, everyone. This will conclude our conference call for today. Thank you.

Operator

Thank you for your participation in today's conference. Ladies and gentlemen this concludes the presentation. You may all disconnect and have a good day.

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Source: Sina Q2 2006 Earnings Conference Call Transcript (SINA)
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