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Executives

Cathy Peng - Manager, Investor Relations

Charles Chao - President, Chief Executive Officer, Director

Herman Yu - Chief Financial Officer

Analysts

Jason Brueschke - Citigroup

Richard Yi - Morgan Stanley

Cathy Chen - Goldman Sachs

Eddie Leung - Banc of America

C. Ming Zhao - SIG

Gene Munster - Piper Jaffray

Steve Weinstein - Pacific Crest Securities

Dick Wei - J.P. Morgan

SINA Corporation (SINA) Q2 2009 Earnings Call August 31, 2009 9:00 PM ET

Operator

Good day, ladies and gentlemen and welcome to the SINA Corporation second quarter 2009 earnings conference call. (Operator Instructions) 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, Madam.

Cathy Peng

Thank you. Good morning. Welcome to SINA's earnings release for the second quarter 2009. 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 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 risks and uncertainties, a number of the important factors that could cause actual results to differ materially from those contained in any forward-looking statements. SINA assumes no obligation 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, 2008 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 second quarter 2009 financial results conference call. For the second quarter, our advertising revenues reached the high-end of our guidance and our non-advertising revenue beat our guidance as our mobile business outperformed. At the beginning of this year, advertisers became much more cautious in advertising spending, especially in the area of brand advertising. The advertising market sentiment improved significantly in the second quarter as the government stimulus package began to take effect and we saw strong rebound in [inaudible] market and the housing market and a strong momentum in automobile sales. As a result, we saw significant sequential growth in advertising revenues in the second quarter. However, on a year-over-year basis, we still experienced a decline in advertising revenues. The second quarter of last year was a particularly strong quarter and we had 58% year-over-year growth due to the Olympic factor.

For the second quarter 2009, we saw sequential growth in advertising revenues in almost all major categories, including automobile, housing, and financial services, FMCG, and IT. On a year-over-year basis, we had quite significant declines in IT and financial services and a modest decline in automobile.

For automobile, the largest ad revenue sector for SINA, even though the sequential rebound has been strong, we experienced a year-over-year decline partly because most of automobile advertising has been focused more on driving sales volume instead of promoting brands and partly because there were fewer new models introduced this quarter compared to the same period last year when many auto clients rushed out new model launches before the Olympic Games.

Categories experienced year-over-year growth were housing, FMCG, and education. We expect these patterns will continue in the third quarter.

Overall, the year 2009 will be a difficult year for SINA's advertising business as there are more signs for the economic recovery underway, we expect our advertising business will continue to improve sequentially for the remaining year. In the meanwhile, we are more focused on investing in our content, products, and brand to further enhance the competitiveness and the value of our online media property.

Now let me talk briefly about our mobile business. In the second quarter, our mobile business grew 26% year-over-year and 7% quarter over quarter. However, we see challenges to grow more business revenue further in the near future, given the intensified competition. As a result, we expect our revenues from the mobile business will be largely flattish in the next couple of quarters. For the year 2009, we still expect our mobile business may grow approximately 10% to 20% in revenues.

During the second quarter, China Mobile, China Unicom, and China Telecom, all launched their 3G service. We believe 3G will provide new opportunities for SINA mobile business going forward over the long-term.

Next I am going to talk about our M&A activities. First I would like to give you an update on our merger process with Focus Media’s out-of-home advertising business. As we stated before, this deal will now be completed without the approval from the Chinese commerce department for the anti-trust review. Until now, we have not received an official application acceptance for the anti-trust review from the commerce department. Given our understanding of such a review process, we believe that it is unlikely that approval will be obtained by the end of September, which is the extended deadline for the deal closing agreed by both parties.

We are currently in discussion with the Focus Media management in either extending the closing deadline or altering the deal structure. We have not reached any conclusion on such discussion at this point.

Secondly, I am going to talk about our real estate business spin-off. On July 23, 2009, we announced that we have entered into a definitive agreement to merge our online real estate business with E-House’s wholly-owned subsidiary CRIC Holdings Limited. E-House is China’s largest real estate agency and consulting service company, with a presence in more than 30 cities. Its subsidiary, CRIC, operates the largest real estate database and provides real estate consulting and data service in China. Under the Agreement, SINA will inject its online real estate business into its majority-owned subsidiary, China Online Housing. CRIC will issue its ordinary shares to SINA in exchange for SINA’s equity interest in China Online Housing, giving SINA a 39% equity interest in CRIC. The closing of the transaction is conditional upon the closing of a proposed initial public offering of CRIC in the United States and certain other customary closing conditions. Immediately upon the closing of the transaction and the Proposed IPO, E-House will be the majority shareholder of CRIC and SINA will be the second largest shareholder of CRIC. Upon the consummation of the transaction, SINA will be required to de-consolidate the financial results of its real estate business and account for its investment in CRIC using the equity method of accounting. Essentially all revenues for SINA's real estate business come from online advertising. Advertising revenues from SINA real estate business accounted for approximately 15% and 16% of SINA’s total advertising revenues for fiscal year 2008 and for the six months ended June 30, 2009, respectively.

In addition, SINA's real estate business -- SINA's real estate advertising revenues generates much higher operating margins than the average operating margin for SINA advertising business due to its much lower than average content and network costs. For the fiscal year 2008 and for the first six months of 2009, the operating margin for SINA real estate business ranges from low to middle 40s percent. Therefore, it is not appropriate to develop the profit contribution from SINA real estate business using average profit margin for SINA.

We are very excited about this great opportunity to further expand our business in the real estate vertical by combining SINA's real estate with CRIC’s real estate information and consulting service, we are creating a leading real estate information service platform both online and offline with multiple revenue streams. This transaction marks a significant step in our strategy to expand the business opportunities of our top verticals by teaming up with industry leaders and leveraging our strong brand recognition and online media platform as well as our large user base. We believe this merger will create significant synergies and will be accretive to SINA's bottom line.

With that, I will now turn it to Herman for financial highlights.

Herman Yu

Thank you, Charles, and thank you all for joining our conference call. Allow me to take you through our financial results for the second quarter of 2009.

Total revenues for the second quarter of 2009 came in at $90.3 million, which exceeds our guidance and represents a year-over-year decline of 1% and a sequential growth of 22%.

  

Our online advertising revenues, which excludes search revenues, for the second quarter of 2009 totaled $57.8 million, representing an 11% decline from the same period last year and a 34% increase from last quarter. For the second quarter of 2009, advertising revenues from China was $57.2 million, which declined 11% from the same period last year but grew 35% from the first quarter of 2009. The sequential growth in the second quarter was much stronger than the seasonal pick-up of a non-Olympic year. We believe this is an indication that the SINA platform stands to benefit more from the improvement in the market in customer sentiment.

On a sequential basis, automobile and real estate, our two largest sectors, performed well. Together they represent 65% of the advertising revenue growth from the first quarter of 2009. We also saw a strong performance on a sequential basis from other sectors such as fast-moving consumer goods, telecom, healthcare, and education. Despite this strong pick-up in the second quarter, visibility is still low. Customer sentiment, while much improved from the low point experienced at the beginning of the year, is still fragile and has been fluctuating on a month-to-month basis. Therefore we believe it is more prudent to proceed with caution in the near future.

On a year-over-year basis, as Charles mentioned, real estate, fast-moving consumer goods, and education performed well. Auto was in line with the total advertising business, while financial and IT significantly underperformed, dragging down our overall advertising results.

Compared to a year ago, average spending per customer in China decreased 10% in the second quarter of 2009 and the number of customers in China dropped 1%.

Turning to our non-advertising business, for the second quarter of 2009 our non-advertising revenues reached $32.5 million, representing an increase of 23% year over year and a 6% increase quarter over quarter. Our mobile value-added services, or MVAS, generated $30.9 million in total revenues, an increase of 26% year over year and 7% quarter over quarter.

Revenues from 2G products were $21.4 million, up 1% from last quarter. SMS and IBR, which represent 96% of the revenues from our 2G products, grew 3% quarter over quarter.

Revenues from 2.5G products were $9.5 million, up 22% from last quarter. MMS and WAP, which make up the majority of our 2.5G revenues, increased 7% quarter over quarter.

As in previous quarters, the sequential revenue changes among SMS, MMS, and IBR product lines mostly reflect allocation of promotional activities to maximize the return on our marketing efforts.

Turning to gross margin, our non-GAAP gross margin, which excludes stock-based compensation and intangible asset amortization for the second quarter of 2009 was 56%, compared to 63% in the second quarter of 2008 and 53% last quarter. Our non-GAAP advertising gross margin for the second quarter was 59%, compared to 65% in the second quarter of 2008 and 52% in last quarter. The year-over-year decline in advertising gross margin was mainly due to a lower revenue base while advertising costs of revenues increase year over year. A key contributor to the higher advertising costs of revenues on a year-over-year basis was the increase in bandwidth costs arising from traffic growth to SINA's website, particularly in video and music streaming.

Non-GAAP gross margin for our wireless business was 50% in the quarter, compared to 55% for the same quarter for the second quarter of 2008 and last quarter. The decline in MVAS gross margin primarily relates to higher costs associated with revenue sharing arrangements. As stated on the last call, while the mobile industry is stabilizing with the promise of 3G, competition in the mobile space is intensifying. We expect the mobile margin to continue to trend downwards over time. To maximize the profitability of our mobile business, we will need to balance mobile revenue growth with margin decline.

Turning to operating expenses, our non-GAAP operating expenses for the second quarter of 2009 was $33.6 million, an increase of 1% from the same period last year and 25% from last quarter. The sequential increase in operating expenses was mainly due to higher marketing expenditures, bonuses and commissions, as well as allowances for bad debt.

In the first quarter of 2009, we temporarily cut our marketing expenses to reflect the market sentiment to our advertising at the time. In the second quarter of 2009, we increased our brand building and promotional efforts to maintain a reasonable awareness level for our brands and products.

Turning to operating income, non-GAAP income from operations for the second quarter of 2009 was $17.4 million, compared to $23.7 million in the same period last year and $12.5 million from last quarter.

Turning to non-operating income, interest and other income for the second quarter was $1.7 million, compared to $4.1 million for the same period last year and $3.1 million last quarter. The decrease in interest and other income was mainly due to lower interest rates on our cash, cash equivalents and short-term investments.

Turning to taxes, provision for income taxes for the second quarter of 2009 was $2 million, compared to $4.2 million for the same period last year and $2.1 million last quarter. The company made a provision for income taxes for the second quarter of 2009 assuming an annual effective tax rate of 11% for its China operations.

Turning to net income and EPS, our non-GAAP net income for the quarter, which excludes stock-based compensation amortization expense of intangibles, and gain on investment, was $17.1 million, compared to $23.5 million in the same period last year, and $13.5 million last quarter. Non-GAAP diluted EPS for the quarter was $0.29, compared to $0.39 in the same period last year and $0.23 last quarter.

Turning to balance sheet and cash flow, as of June 30, 2009, our cash, cash equivalents and short-term investments were $582 million, compared to $540.9 million at the end of Q208 and $603.8 million at the end of 2008. Cash flow from operating activities for the second quarter of 2009 was $18.8 million, compared to $20.8 million for the same period last year and $15.9 million last quarter.

Let me now turn to our guidance for the third quarter of 2009 -- we are targeting total revenues of $91 million to $94 million. For online advertising, we are targeting $60 million to $62 million. For our non-advertising business, we are targeting $31 million to $32 million. For stock-based compensation, we expect between $3 million to $4 million, which excludes any new shares that may be issued.

Before I turn the call over to our Operator, let me summarize our call today. Similar to advertising industries in other parts of the world, the advertising industry in China has been hit hard by the impact of the financial crisis. Although we have seen some rebound from the first quarter low, the advertising environment in China is still challenging and visibility is still low. We believe it is more prudent to stay cautious in the near-term. Despite the challenging economic environment, we must continue to invest in areas that have given us a competitive advantage, such as increasing bandwidth to support website traffic growth, opportunistically adding to our large portfolio of premium content, increasing the market conditions -- increase the market recognition and influence of our brand, and building new and innovative products that improve our user experience with content consumption and communication. We believe investments in these areas are critical for the long-term success of the company, even if it means sacrificing near-term margin pressure.

The current economic environment also brings us new opportunities. As the advertising marketplaces gets reshuffled by the disruption from the financial crisis, we are seeing some of our peers [inaudible] to conserve cash flow while others diversify into other domains. History has shown that successful media companies usually come to be by building scale and market influence. We are taking big steps to play a great role to advertising customers in China by partnering with other industry giants and leveraging the SINA platform. We believe our efforts to go deeper into advertising space shows our commitment to online media as our core business and will allow us to further increase our influence in the advertising market in China and allow us to be even better positioned for economic recovery.

With that, I would like to turn our call to the Q&A session. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Jason Brueschke with Citigroup.

Jason Brueschke - Citigroup

Thank you. Charles, my first question maybe deals with the demand outlook. Could you give us some more color on your framework agreements, how much of those that have been allocated have been spent kind of year-to-date and do you expect to be spent in the third quarter? And I guess the gist of my question is really trying to understand with the kind of gradual improving sentiment in China, should we be expecting some type of a budget flush for advertisers to go ahead and spend whatever they have allocated to the budget but haven’t spent in the fourth quarter? Or should we be more expecting the fourth quarter to be kind of a normal sequentially slightly weaker quarter compared to the third quarter? And then I have maybe one or two follow-up questions. Thanks.

Charles Chao

On the execution of the frame contracts, I don’t have very, very detailed specific numbers but my understanding is these contracts are pretty much -- I mean, are in the plan in terms of expanding I mean based on our expectation and I think overall I think -- I mean, there’s not really too much of a big surprise to us except I mean as Herman mentioned that the overall sentiment is still quite cautious and so although we are seeing people spending money but I mean, they are more cautious in terms of giving more specific long-term commitment, firm commitment on a particular ad campaign, whatever. And so I mean, you are seeing a gradual improvement but on the other hand, I mean, the sentiment is -- I mean, it’s much better than the first quarter where we had experienced but overall, I mean, it’s still a cautious mood for the overall advertising market. And for the -- for third quarter, for example, I mean our current guidance probably is a little bit lower than our original expected, partly because there are some uncertainties in terms of some budget come in at the end of the quarter. I mean, it was not expected, I mean basically and so at this point, the visibility for fourth quarter is still quite low but obviously given our experience and our understanding of the market and given our contact communication with the clients, we believe fourth quarter would still be a sequential growth quarter from third quarter but it’s hard at this point to see how much growth we will have for fourth quarter sequentially.

Jason Brueschke - Citigroup

Perfect, thank you. And then maybe just a question or two on the M&A -- first for you, Charles, could you maybe discuss what are some of the possible alternatives that are available to you and Focus Media apart from an outright asset purchase that might need commerce department approval? In other words, are there ways for the two companies to work together and achieve many of the benefits that you envision from the asset purchase but through some type of a structure that would not need commerce department approval? Any type of just color or thoughts on what’s the available alternatives would be helpful?

And then finally for Herman, if you could maybe give us what the general range of the operating margins of the E-House side of this [carve-out] is going to be, that would be helpful as well. Thank you.

Charles Chao

Okay, on the Focus Media deal, at this point obviously we have three options. One is continue to try to complete the deal with extended deadline, which is very easy to achieve if both parties agree to extend the deadline and we are in discussions with Focus Media’s management to see if this is something that we are going to proceed, given our understanding of anti-trust review process here. I think this is going to be taking a longer time but is achievable for the -- if we want to go to that particular direction. And the second option obviously we try to alter the structure so we can, just like you said, try to achieve some of the synergies we talked about and we envisioned when we did the deal. And but was less than a complete merger for these two companies but I really cannot really get into a lot of specifics on some of the alternative structures because a lot of these are still in discussion and we really -- it’s probably too early for us to share some of the ideas at this point. But obviously in terms of realizing the synergies between these two companies and envision a lot of things we could have done if this merger was completed. I mean, these [alternative] structures will be less effective. And the third option obviously is to doing nothing. I mean, but at this point, we still think that the idea of the merger of these two companies and they try to create a lot of synergies is a great idea and we try to make every effort to make the deal happen and so that is about Focus Media and I will let Herman to handle the second question you have.

Herman Yu

As you know, CRIC has stated publicly that they are planning for an IPO, so I can't talk too much about it but basically the wholly-owned subsidiary of E-House does consulting and database related business. E-House is a publicly listed company on the NYSE and they file an annual report, so you can brief their last year’s 20-F that gives you segment carve-out of their consulting and database business.

Jason Brueschke - Citigroup

Great. Thank you.

Operator

We’ll take our next question from the line of Richard Yi with Morgan Stanley.

Richard Yi - Morgan Stanley

Good morning. I have two questions -- first starting with the advertising outlook, obviously 2009 is a very challenging year for most of the advertising leaders, and including yourself. But we are very anxious and anxiously looking into the 2010 budget and so based on their initial feedback, especially from your international clients, should we expect a significant ramp-up of the fiscal year 2010 budget on their end? And what is the current split, revenue split between your international clients and advertising clients?

Charles Chao

Okay, let me answer the first question first and international clients are becoming less important in our overall client portfolios in terms of revenue contribution. So the increase or decrease of the budget for international clients will not really have any significant impact on our total revenues going forward and -- but with regard to your first question of the outlook for 2010, I mean, it’s really too early to tell. I think it’s more a function of the market economy versus our specific communication with our clients and if this recovery continues as is right now and not too many downside adjustments in the market and we obviously believe and with a more comfortable base to grow going forward, and 2010 will be a growth year for advertising business for us and for the overall market. But I think it’s really more a function of the market and especially the continuous economic recovery is a must-have condition for this kind of anticipated growth going forward.

Richard Yi - Morgan Stanley

Thanks, Charles. And my second question is regarding your mobile service and what would you envision as the next killer application for your 3G service? Would that be 3G WAP or any new service under development? And also, given the rising competition among the [telecom] carriers, are you seeing -- are you getting more favorable terms from the [telecom] carriers?

Charles Chao

Well I think in terms of the two parts of the business for mobile, one is our traditional SP business, which basically offers like ringtones, news, short message service and MMS service, these types of things. This will continue, especially we believe MMS will become more popular going forward, given more people are using video and using the picture function of the mobile phone. But for the other killer apps in the 3G, I think it’s still in the development stage -- I mean, I think in the 3G area, I mean, expand a lot of opportunities in our traditional offering in the area of video gaming and also in the areas of the readings, talking about literature reading on the mobile phone and obviously I mean, we have good positions in all these three sectors. I mean, when talking about mobile gaming, I mean obviously we are not known for the gaming business but in the mobile gaming, we have position with a dedicated company subsidiary doing the mobile games. I mean, and so we are also pretty large in terms of mobile gaming revenues, in terms of -- among SPs in China at this point. So these areas, I mean, obviously we offer more opportunities going forward but I think 3G is still going to be a long process in terms of its coverage and its acceptance by the market, so we are talking about more long-term in these areas.

In terms of the competition about the telecom operators, obviously I mean, this creates a better environment for the content providers, service providers in overall and but it’s not so much about SP but more about the content service and other services in the 3G area and this, as I said, is still in an early stage. But the overall environment will become more friendly for service providers and content providers like us.

Richard Yi - Morgan Stanley

Thank you, Charles.

Operator

We’ll take our next question from the line of Cathy Chen with Goldman Sachs.

Cathy Chen - Goldman Sachs

Thanks for taking my question. I have two questions. One is can you share with us some outlook on margin execution for the third quarter, and then if possible for the fourth quarter as well, particularly with the increased sales and marketing spend in the second quarter, should we expect that to continue in the second half?

My second question is a follow-up regarding the comments on the Focus deal -- I understand that negotiations are still undergoing but could you share which of the three options that you highlighted is preferred from SINA's side? And also with the first option being that you extend the deadline, could you share some color on the Ministry of Commerce approval process, given that it’s been nine months, so what can we expect could change for that to still come through, if the deadline is extended? Thank you.

Charles Chao

Maybe Herman can take the first question and I will take the second.

Herman Yu

With regard to margin, I think you can expect for the next couple of quarters that the cost of revenues and the operating expenses will trend up. As you know, each quarter adds bandwidth as we acquire new content and so forth, cost of revenues will have to go up. With regard to operating expenses, you know, sales and marketing [inaudible] on our brand activity based on revenue increase because of commissions, so forth. As we need to buy more bandwidth, we need to buy more servers and so forth, so I would expect both cost of revenues and operating expenses to be trending up sequentially for the next quarter or two.

Charles Chao

Let me just add one point here and if our real estate business is topped out in the future, I mean, there will be tentatively, there will be negative impact on the gross margin and the operating margin because that particular business has much higher gross margin and operating margin as we just talked about, and so I think that will have a negative impact for short term. But we hope that on the overall basis, I mean, the net income basis, net margin will not be affected and as I said, it will be a little bit accretive here.

For your second question, Cathy, regarding Focus Media, I really cannot talk too much specifics in terms of the preferred options and the alternatives but if you ask for my preference, obviously if -- I mean, the review process can be achieved quickly in the near future, I mean, the complete merger is always preferred, given that our understanding of the business, given that the -- you know, the kind of objective we tried to achieve in this kind of deal and obviously you can understand that a further consolidation would be preferred in this kind of acquisition. And -- but this also depends on our assessment on how quickly, I mean, if we can extend the deadline, how quickly we can achieve that. At this point, we are still in the review process. We believe that some of the difficulties we have encountered can be overcome given the time but it’s difficult to assess what exactly is the timing for such a process. And so that’s why we are also talking and considering other alternatives at this point but for other alternatives, I really cannot give you too much color at this point.

Cathy Chen - Goldman Sachs

Could you share any color on the process with the Ministry of Commerce in terms of if there are specific feedback they have given that could change whether or not it is approved in the near term?

Charles Chao

No, I cannot talk too much detail about that. Sorry about that.

Cathy Chen - Goldman Sachs

Okay. Thank you.

Operator

We’ll take our next question from the line of Eddie Leung with Banc of America.

Eddie Leung - Banc of America

Good morning. My question is on your third quarter outlook -- could you comment on the relative performance of the different advertiser industries in the third quarter and how is that different from the second quarter or the first half of the year? Thanks.

Charles Chao

I am sorry, I did not quite get the question -- can you repeat?

Eddie Leung - Banc of America

Sure. I am just wondering if you guys could comment on the relative performance of your different advertiser industries in the third quarter, given the outlook, how that is different from the first half of the year?

Charles Chao

Okay, I got the question. As I said in my opening statement that the pattern that we had experienced in the second quarter, most of these will continue in the third quarter, meaning that we are still going to probably see some declines in financial service, IT, and automobile, and obviously these are three of our big categories and for real estate, I mean, we saw some growth in the second quarter but we probably will still see some growth in the third quarter and for the other categories like FMCG, the education and telecom service and I think we are going to see some growth but not so much, mainly because -- I mean, these are some of the big spenders, especially in FMCG and telecom service were the larger advertisers during the Olympic Games last year. And so it’s difficult to compare but if you look at the market trend, obviously excluding the Olympic effect and we probably will see some of the growth in the FMCG and the telecom service area but it happened to be that these two categories are some of the very large revenue contributors for the Olympic Games last year, so it’s hard to make a comparison here apple by apple here.

Eddie Leung - Banc of America

Thanks, and my last question is regarding your online video offerings. Could you give us an update on the monetization plans and the future development in that area? Thanks.

Charles Chao

Sure. Online video is a very important part of our online media strategy. We believe video is going to play a very, very critical role in terms of future media competition and we are doing every effort, making every effort to build a very, very strong robust video platform in China, so our video offering includes, I mean, a broadcasting platform which allow the users to share their video and we also work with a lot of video, the content providers, including television stations and production house and other content providers to get their video and so another big offering is to provide a video related news and these types of things, which is also growing very, very fast on the platform. And the third area and we work with the movie, you know, content providers and the TV mini series content providers and to get their also called premium content and we have built a very robust platform for these online -- I mean, what we call the premium content platform.

So there’s a lot of things we are doing in the video and we have seen significant increase in our video traffic in this year compared to last year and that’s why Herman mentioned that we have seen significant growth, the increase in our bandwidth costs this year but I think this area we are going to invest further and this is -- standing alone, it’s a very important application for future monetization and as part of our total media strategy, it’s a very, very important part of it.

And in terms of monetization of the online video, we actually see a lot of very good improvement this year. Previously last year, I mean, if you look at all the video advertising, mainly these revenues are coming from the pop-up video frame, I mean, our major content pages and we also have a brief kind of revenue contribution from our Olympic sponsors last year for the video advertising within the video content shelf last year. But after the Olympic Games, a lot of these video advertising has pretty much I mean decreased very significantly in the first quarter and the first quarter this year. But we see a very strong ramp up in the so-called [mature] video online advertising, meaning the video played within the video content. I mean, this year in the second quarter and the third quarter, and we pretty much more than doubled our revenue from these online video advertising in the second quarter from first quarter and in the third quarter we are going to do more than double again from the second quarter. So we see very good trend in this area and we are going to continue to invest in this video content and also try to monetize and build a very robust monetization platform for the video offering here.

Eddie Leung - Banc of America

Got it. Thank you.

Operator

We’ll take our next question from the line of Ming Zhao with SIG.

C. Ming Zhao - SIG

Thank you for taking my question. Good morning. I also have a question on the advertising gross margin. So Herman, do you think the second quarter’s gross margin of advertising is sustainable? I mean, if we look at the past year’s, the advertising gross margin compared with that, the advertising margin in the second quarter did come down quite a bit, at least by 500 basis points versus the average level in the past. So should we expect the gross margin to continue to go down as we invest more in the bandwidth? And then once your monetization of video can be scalable, then we see that coming back -- how do you -- how do we look at the time align of that trend?

Herman Yu

I think given where we are with the environment right now, it’s really hard to manage to a particular margin on a quarterly basis because as you know, for cost of revenues, the two main drivers, one is content and the other one is bandwidth, so the bandwidth, we want to support whenever there is website growth. On the content side, it’s really opportunity wherever there’s premium content, given that particular quarter and we think that this is something that’s very premium and it is very important to us, we’ll acquire. So on a quarter by quarter basis, you might see our margins fluctuate a little bit. But as I mentioned earlier, for Q3 you should expect some growth from Q2 in absolute dollars.

C. Ming Zhao - SIG

You mean the cost of advertising, right?

Herman Yu

Yes.

C. Ming Zhao - SIG

Okay. And the second question, which is about -- still about your third quarter advertising revenue guidance, which basically shows mid-single-digit quarter-over-quarter growth if we don’t look at the year-over-year comparison and only look at the quarter over quarter, it seems like this quarter over quarter growth is below ‘07’s. Is that because of the second quarter, you have a big ramp-up then the quarter over quarter eased in the third quarter? How should we interpret that?

Charles Chao

This is probably the reason there was a big ramp-up in Q2. I think in Q2 obviously you had a lot of activities and we boosted advertising revenues but in the third quarter, there are not too many -- I would say events driven marketing, I mean, in the third quarter except for the national day, I mean, that’s going to happen at the end of the -- October 1st and so there will be some campaigns to cover that particular big event because there is a big celebration in China for the 60th anniversary of the founding of the People’s Republic, and so there will be a lot of activities. But that particular budget will cover both third quarter and fourth quarter but will be more allocated [first quarter].

And so that is part of the reason there were more activities in the second quarter, and also the second quarter had an auto show which helped to boost the auto revenues significantly on a sequential basis. And the other factor, as I said, I mean, it was just less visibility and in terms of demand on the market and as I said earlier, there were -- I mean, this guidance is lower than we originally expected ourselves and partly because some of the uncertainties created in the near future for certain clients and so I think that’s probably a reflection of the overall marketing segment. I’m not going to say this is anything specific that caused this kind of -- I want to say good growth rate.

C. Ming Zhao - SIG

Okay. Thank you very much.

Operator

We’ll take our next question from the line of Gene Munster with Piper Jaffray.

Gene Munster - Piper Jaffray

Good morning. If you could talk a little bit about -- obviously you have E-House as one of the verticals that you are spinning out. Do you think I guess six to 12 months down the road, there will be other verticals that you could grow and try to spin out, similar to E-House? And if so, what would some of those potential areas be?

Charles Chao

I think this is part of, as I said in my earlier statement, this is part of our strategy to work with the leaders in particular industries, to team up with them and to try to realize more benefit from our verticals going forward, if that means we have to go deep in the verticals. If you look at the SINA revenue components, I mean, a lot of these are coming from certain sectors, like automobile, like finance, like FMCG and housing obviously is another very big one. And if we look at the competition here in the market and some of the challenges we are facing here, in big areas when you have a lot of big verticals, obviously it is very difficult to compete. We have our advantage in this area, meaning that we have a very strong brand recognition, very strong media platform and a very good high-end user base on our platform. On the other hand, the resources and the focus we can devote to any particular vertical is limited compared to a lot of vertical sites. So we have to go deep in these verticals and it’s a good strategy to work with the industry leaders that are complementary to our existing offers. I mean, we are obviously very strong in online advertising but there are a lot of areas, I mean, verticals. There are a lot of other online opportunities -- e-commerce, database service, for example, the other fee-based services in these verticals. If we want to try to take advantage of these opportunities and try to monetize our traffic better, I mean, it’s important that we go to -- go deep into these areas and try to create multiple revenue streams but it’s hard to do that with ourselves, given our limited resources, given our limited attention here and also I mean, we need industry expertise in a particular vertical in order to be very effective for monetization in areas of other revenue streams.

So as an overall strategy, this is a trend for SINA going forward but in terms of specifics, it’s not like we can plan for every vertical at this point. It’s more like a case-by-case basis and looking at, you know, we have to find the right partners and with a good fit in terms of strategies, in terms of team and chemistry and also the shareholder structures. So there are a lot of factors that impact the timing but this is the trend [whether] is going to continue in the future.

Gene Munster - Piper Jaffray

Do you think that in let’s say 18 months there will be another vertical that you will have identified that we’ll be aware of at that point that could be another opportunity like E-House? Or is that too optimistic to think a year-and-a-half just in [inaudible]?

Charles Chao

Well, I really cannot comment on specifics but 18 months seems to be a reasonable time period for us to consider and -- but as I said, as we plan to do more of these vertical expansions, we are obviously very actively looking to these opportunities and so when the opportunity fits, we are going to move forward very quickly.

Gene Munster - Piper Jaffray

Okay, one just quick follow-up question -- on Sohu’s call, they had talked about over the last couple of quarters increased sales and marketing spending to try to build their brand and on their June call, they talked about that kind of extending through 2010. Has there been a change in the competitive dynamics between you two in terms of how much money is being spent to win --

Charles Chao

Well, obviously we noticed they are spending more money on their marketing effort, on their branding effort -- I mean, through online and offline media and other activities. And part of it, I mean, we also increased our budget into these areas but I think a lot of the brand recognition and the customer user experience is not created by brand recognition, is not really -- I mean, these kinds of campaigns will have limited impact on the shift of the loyalty of the users, and so we are not too much concerned in this particular area but on the other hand, obviously we will have spend a reasonable amount of money to keep our brand awareness in the market so we can keep the leadership position in this particular sector.

Operator

We’ll take our next question from the line of Steve Weinstein with Pacific Crest.

Steve Weinstein - Pacific Crest Securities

Great, thank you for taking my questions. It’s actually a follow-up on one that was asked earlier. You are commenting on some improvement in the overall ad market. I think we saw some strength [inaudible] Q2 and that’s been echoed by other companies but when I look at the sequential revenue growth for your advertising guidance, it’s a lot less than what you would have done historically. I think historically [inaudible] a double-digit type of sequential growth number, so I am wondering if we could get a little more color as to why that’s your guidance and how much of that reflects what you have seen in the first two months of the quarter versus maybe just conservatism due to lower visibility for the month of September. Thanks.

Charles Chao

Steve, I think I already made enough comments on that particular question. I really don’t have too much to add to this one.

Steve Weinstein - Pacific Crest Securities

Okay.

Charles Chao

Okay? Anymore questions?

Operator

Our last question comes from the line of Dick Wei with J.P. Morgan.

Dick Wei - J.P. Morgan

Thanks for taking my questions. I have two questions. The first question is that I think going into [one or two years], what would be the area of content or editorial investment that you will make a strong investment in -- for example, you mentioned video. [Is there anything] else like [inaudible], et cetera?

My second question is that what -- I guess maybe year over year, what has been the traffic growth for SINA overall or maybe for some of the [inaudible] that you can discuss?

Charles Chao

Dick, I could not hear you very clearly. I mean, is the first question regarding our content investment in ‘010? Dick?

Dick Wei - J.P. Morgan

Yes, that’s correct.

Charles Chao

Okay, let me try to answer the first question first. I did not really hear the second question. The content investment obviously is something we have always been doing and we will judge the value-added content vis-à-vis the impact on our platform and also on the market. And the areas of the focus obviously I mean is still some of the video content and also some premium content related to the sports. And in ‘010, obviously the World Cup is here, so we will have to probably invest more in the World Cup content in ‘010 and in the video, I think we probably will be more conservative in terms of exactly where we are going to invest because there is a balance here in terms of how much video content you want to buy and how much benefit you can generate and obviously if the China market is a market that with full content copyright protection, it’s worthwhile to invest more in the video content to build a more big platform here. But unfortunately this is not the case so we will have to be very cautious into our video content investment and by looking at every case case-by-case to see whether this is going to be beneficial to us for short-term and long-term. And so I think the content area we are going to increase, as Herman mentioned, sequentially and also year over year next year but I don’t see that is going to be a very significant pick-up on the content cost. I mean, at least in the near-term.

For the -- I’m sorry, what is the second question, Dick?

Operator

I am sorry, he is no longer on the line.

Charles Chao

Okay.

Operator

I would now like to turn the presentation over to Cathy Peng for closing remarks.

Cathy Peng

Thank you. That concludes today’s conference call. Thanks for joining. We’ll see you next quarter.

Operator

Thank you for your participation in today’s conference. This concludes your presentation and you may now disconnect.

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Source: SINA Q2 2009 Earnings Call Transcript
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