SINA Corporation's CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: Sina Corporation (SINA)

SINA Corporation (NASDAQ:SINA)

Q3 2013 Earnings Conference Call

November 12, 2013 8:00 p.m. ET

Executives

Cathy Peng – IR Manager

Charles Chao – Chairman and CEO

Herman Yu – CFO

Analysts

Eddie Leung – Bank of America Merrill Lynch

Alex Yao – JPMorgan

Ming Zhao – 86Research

Piyush Mubayi – Goldman Sachs

Alicia Yap – Barclays

[Julian Chung] from Morgan Stanley

Vivian Hao – Deutsche Bank

Tian Hou – T.H. Capital

Cynthia Meng – Jefferies

Operator

Welcome to Sina Corporation's Third Quarter 2013 Earnings Conference Call.

At this time all participants are in a listen-only mode. However, we will be facilitating a question-and-answer session towards the end of today's conference.

I would now like to turn the presentation over to your host for today's conference, Ms. Cathy Peng, Investor Relations Manager. Please go ahead, ma'am.

Cathy Peng

Thank you. Good morning. Welcome to SINA's earnings release for the third quarter 2013. Joining me today are our Chairman 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 (AUDIO GAP)

Charles Chao

-- non-GAAP operating income increased by 331% on a year-over-year basis. We expect our revenue growth acceleration and the profit margin expansion will continue in the fourth quarter. The unit base for Weibo continued its healthy growth in the third quarter with daily active users, or DAU, for Weibo increased by 11.2% to reach 60.2 million from the month of June to the month of September. This growth rate is higher than the sequential growth rate of 8.3$ from the month of March to the month of June.

The average time spent for our daily active user on Weibo was unchanged between the month of June and the month of September, with a slight increase in time spent on mobile terminal and a slight decrease in time spent on PC. This is encouraging as the competition for time spent on mobile terminals has further intensified.

During the previous quarter we [renovated] the marketing system to allow more efficient one-to-many communication on Weibo and launched page system on Weibo for both mobile and PC to allow users to follow an object or location so that we can expand the connections beyond user accounts. Those initiatives were well-received by users as we saw significant increases in messaging activities as well as millions of pages being created.

In addition, we saw many media accounts have migrated to the new page system and the result in significant increases for these accounts in traffic. Recently we have launched a fan service system for media accounts and enterprise accounts which allows these accounts to utilize our messaging system to reach their fans directly and to provide interactive services to their fans. We believe this is an important experiment to convert Weibo from a social media platform to social media and a service platform.

For the third quarter, total advertising revenues grew by 26% year over year, and this was in comparison with the third quarter of 2012 when significant advertising revenues were generated from Olympic Games. On a sequential basis, advertising revenues also grew by 26%, which was significant based on the historical trends. Advertising revenues from Weibo grew by 125% on a yearly basis and 46% on sequential basis. Automobile and e-commerce are the major factors contributing to the advertising revenue growth in the third quarter.

Our partnership with Alibaba Group has played an important role in advertising revenue growth in the third quarter for Weibo as more and more online merchants started to spend marketing dollars through Alibaba during the quarter. Another encouraging trend was the advertising revenues from SMEs utilizing our information feed advertising system started to pick up during the third quarter, with both revenues and number of customers doubled compared to the previous quarter. We have seen continued improvement and effective [CPM] for our information feed advertising and expect that related revenues will continue to grow at accelerated pace in the fourth quarter.

Now let me provide an update on our partnership with Alibaba. As we discussed previously, the two companies had assigned dedicated teams to work on connecting the user accounts and the user data between the two platforms. During the third quarter we launched the first phase of our joint program with user ID connection between Taobao and weibo. Up to now the accounts for approximately 48% of our daily active user had been connected to their corresponding Taobao accounts.

Also during the third quarter we integrated Weibo management system into Taobao merchant administrative accounts. This initiative was designed to provide better service for Taobao merchants to share their content on Weibo and to monitor the effectiveness of their social marketing campaigns. In addition, it will also provide a better user experience for our Weibo users with more diversified content and a better marketing experience. Although the merchants who have utilized this management system have seen significant improvements for the effectiveness of their campaigns on Weibo, the number of merchants who have adopted this system was behind our schedule.

We have formed a joint team to enhance the operation of this project to try to move more merchants to this system. Separately, we have expanded our partnership with Alipay recently by forming a joint force to create more efficient mobile payment solution for Weibo. We continue to believe that the mobile payment is essential for mobile monetization and it is also critical for online-to-offline marketing and transactions. By teaming up with Alipay, we will be able to connect tens of millions of Alipay users to build up the scale of our mobile Weibo payment much more quickly.

Before I turn to Herman for financial review, I just want to say that, although it looks like we're approaching the breakeven line for our Weibo business with the momentum of Weibo monetization, our long-term goal is still to build an ecosystem surrounding the Weibo social media platform. We're conscious of striking a balance between monetization and user experience and we'll continue to work hard to improve our product and user experience over the long run.

With that, I'm now turning to Herman Yu for a more detailed financial review.

Herman Yu

Thank you, Charles, and thank you all for joining our conference call today. Allow me to take you through our financial highlights for the third quarter of 2013.

At the beginning of the year we have set 2013 as a year to deliver returns on the investment that we have made in the past years. Today I am delighted to share that we are delivering on that promise as Weibo monetization picks up.

Our non-GAAP net revenues for the third quarter of 2013 grew 22% to $179.9 million, reaching the high end of our guidance of between $176 million and $180 million. As our revenue drivers expand beyond portal advertising to Weibo advertising, to Weibo value-added services, Weibo VAS, our efforts to diversify SINA's revenue stream is allowing us to diversify our customer segments from brand advertisers to Alibaba e-commerce merchant, to our own SME network, to fee-based B2C or business-to-consumer areas. Such revenue diversification is enabling us to make additional investments in the core areas of our business including Weibo, SINA mobile and so forth, while growing SINA's profit margin.

For the third quarter of 2013, non-GAAP net income attributed to SINA grew 144% to $28.5 million or $0.42 in non-GAAP diluted earnings per share. Our non-GAAP net income in the third quarter of 2013 included Weibo-related net spending of $4.8 million, net of the $53.4 million of Weibo-related revenues.

Let me now run through the other key financial highlights. Starting with online advertising revenues. SINA's online advertising revenues for the third quarter of 2013 grew 26% year over year $151.6 million, which is within our original guidance between $151 million and $153 million. With Weibo's monetization picking up, our online advertising now includes portal brand advertising, Weibo brand advertising, Weibo advertising with Alibaba e-commerce merchants, as well as Weibo small and medium-sized enterprise advertising.

Our portal advertising for the third quarter of 2013 came in at $107.8 million, representing a growth of 7% year over year despite a high base last year which was an Olympic quarter. This result was an improvement from the first half of 2013 where we experienced a slight decline of 3% from the same period last year. The strength of our portal advertising in the third quarter can be attributed to the automobile sector as well as the internet sector such as e-commerce and online game advertisers.

During the third quarter of 2013, Weibo advertising grew 125% year over year to $43.7 million. The growth of Weibo advertising can be attributed to both Weibo's real-time bidding ad network for SME advertisers as well Taobao e-commerce merchants. [Earnings] from Alibaba in the third quarter grew almost four times from the prior quarter.

Turning to non-advertising, for the third quarter of 2013 we generated $28.4 million in non-GAAP non-advertising revenues. Weibo value-added services revenues which primarily include revenue share from web games and Weibo membership fees grew 121% year over year to $9.7 million.

Turning to gross margin, gross margin for the third quarter of 2013 was 64%, up from 54% for the same period last year. Non-GAAP advertising gross margin for the third quarter was 64%, up from 36% for the same period last year, reflecting our efforts to grow our advertising business comfortably.

Non-GAAP non-advertising revenue gross margin for the third quarter of 2013 was 58%, up from 43% for the same period last year, primarily due to the shift in revenue contribution from low-margin mobile value-added services business to higher-margin Weibo value-added services business.

Turning to operating expenses. Non-GAAP operating expenses for the third quarter of 2013 were $90.5 million compared to $73.7 million for the same period last year. The increase in non-GAAP operating expenses was primarily due to the higher personnel costs including headcount increases as well as general salary increases, as well as increases in marketing expenditures.

As a result of our revenue growth, coupled with relatively low expenditure increases, our non-GAAP income from operation for the third quarter of 2013 grew over four-folds to $23.7 million, up from $5.4 million for the same period last year.

Non-operating income for the third quarter of 2013 decreased slightly to $7.7 million from $8.3 million. Non-GAAP earnings from equity investments which were reported on a one-quarter lag basis were $5.7 million for the third quarter of 2013 compared to $4 million for the same period last year.

Turning to taxes, for the third quarter of 2013, provision for income taxes, which is based on SINA operational results in China, was $5.3 million, compared to $1.6 million for the same period last year.

Turning to net income, non-GAAP net income attributed to SINA for the third quarter of 2013 grew 144% to $28.5 million compared to $11.7 million for the same period last year. Non-GAAP diluted earnings per share for the third quarter was $0.42 compared to $0.17 per share for the same period last year.

Turning to balance sheet and cash flow items, as of September 30, 2013, SINA's cash, cash equivalents and short-term investments totaled $1.2 billion, compared to $713.6 million as of December 31, 2012. The increase in cash, cash equivalents and short-term investments was mainly due to the cash received from Alibaba for their investment in Weibo in the second quarter of this year.

Cash provided by operating activities for the third quarter of 2013 was $12.3 million. Capital expenditure totaled $24.3 million. And depreciation expenses were $8.6 million.

Turning now to our fourth quarter 2013 guidance, for the fourth quarter of 2013, we are targeting net revenues between $190 million and $194 million, representing an increase of 41% to 44% year over year. For advertising revenue we are targeting between $160 million and $162 million, representing an increase of 45% to 46% year over year.

For non-GAAP non-advertising revenues, we're targeting between $30 million and $32 million, representing an increase of 26% to 34% year over year. Non-GAAP non-advertising revenues assume Weibo value-added services will grow sequentially, partially offset by further decline in mobile value-added services revenues. Non-GAAP net revenues and non-GAAP non-advertising revenues excludes the recognition of $4.7 million in deferred license revenues related to SINA's equity investment in E-House.

In summary, we saw strong execution in the third quarter with total revenues growing 22% year over year which we expect to accelerate to over 40% in the fourth quarter. The strength of the third quarter revenues benefited from a reversal in our portal advertising trend which is seeing growth on a year-over-year basis, while both Weibo advertising and Weibo value-added services are growing over 120% year over year.

Over the same period, non-GAAP net profit grew over 144%. SINA's efforts to focus on core strength -- to focus on our core strength and grow profitably is enabling us to increase our revenues, continue to invest and innovate in key areas for our future, while steadily boosting our profit margin.

This concludes the written portion of our call. We are now ready for questions. Go ahead, operator.

Question-and-Answer Session

Operator

(Operator Instructions).

Your first question today comes from the line of Eddie Leung from Merrill Lynch. Eddie, please go ahead.

Eddie Leung – Bank of America Merrill Lynch

Hey, good morning. Thank you for taking my questions. I have two questions. The first one is about your Weibo advertising pieces. You mentioned that you have a [few] advertising base that you need to serve right now, SME, your own brand advertisers, as well as Alibaba e-commerce advertisers. Just wondering, internally, how you guys planning about allocating different advertising resources to different advertiser base, how you think about what ROI you can get from different advertiser base. So that's my first question.

And then second question is about housekeeping items. Could you give us an update on the Weibo corporate at hand for the quarter as well as the Weibo related expenses? Thank you.

Charles Chao

Okay, Eddie. This is Charles. I will take your first question.

Related to the resource allocation among different customer bases for Weibo advertising, and this is actually a very good question. So we have -- traditionally we have large brand advertiser bases which is utilizing our portal as well as Weibo for their advertising service. And this is actually one of our core business as you know. And so over the course of this year, I mean we have developed advertising services for SMEs, which mainly actually utilize our -- the information feed advertising system called [indiscernible] you probably heard [that term]. And so this is more like for [government base], I mean advertising system within the information feed itself, I mean. And so this particular [indiscernible] SMEs and for the display for brand advertising, we have our dedicated, I mean, inventories like the ones on the right side of the PC and also on the top of the information feed at the very top. And also that includes of the interactive [indiscernible] for the interactions for the user participation for the advertising campaign launched by our brand advertisers. This is a very typical inventory for brand advertisers.

Then with [indiscernible] we have said previously that we dedicate certain areas for their advertising. Initially you have when location [indiscernible] right side of the first page, front page of Weibo and also at the very bottom Weibo, first page. And then we also added some dedicated inventory within the information news feed, but this is not included. It is not part of [indiscernible] but after we did some experiment without that portion [indiscernible] on the right side and on the bottom, for now, and we are experimenting different kind of ways of doing more effective marketing campaign for the -- on our [mergence] for Ali.

But having said that, basically we have different kinds of advertising resources for different type of advertising customers. But having said that [indiscernible] a problem we encountered during the third quarter because much of the advertising services, I mean going through Ali service -- Alibaba service [indiscernible] performance-based, and so we did not expect that the original inventory dedicated to Ali alone was not enough to fulfill that requirement, so we actually used a lot of inventories for -- traditionally for brand advertising to fulfill that performance requirement during third quarter, which actually put a lot of pressure on our inventories for -- which was originally designed dedicated to the brand advertisers.

So if you look at the numbers, I mean for third quarter, Ali's advertising actually played a very important role in Weibo advertising growth. But on the other hand, I mean because of inventory constraint I just mentioned about fulfilling the performance requirement for Ali advertising, we were not able to grow too much, I mean, for our display advertising for our traditional brand customers.

So we are doing some adjustments on that front to make sure we can manage inventory better in the future so that we can maximize our utilization and our eye as you said for advertising inventories as a whole. I hope that answers your question.

The second question, maybe Herman can take it.

Herman Yu

Eddie, can you repeat your second question?

Eddie Leung – Bank of America Merrill Lynch

Sure. Herman, just want to get a sense of your corporate count number as well as the expenses related to Weibo. Thank you.

Herman Yu

Okay. So the corporate count number, it's about 400,000. And the expenses related to Weibo, as I mentioned in my call, that, net of revenues, is about $5 million.

Eddie Leung – Bank of America Merrill Lynch

Thank you.

Operator

Your next question today comes from the line of Alex Yao from JPMorgan. Alex, please go ahead.

Alex Yao – JPMorgan

Hi, good morning everyone. Thank you very much for taking my questions. I have a few quick questions on the [indiscernible] networks platform you guys [indiscernible] during the quarter. Firstly, why do you guys want to build an S network [indiscernible] third party ones?

Secondly, can you share with us the initial feedback from the users and what's the outlook over the next few quarters? Thirdly, can you talk about the quarter revenue concentration situation now, what percentage of the inventory are actually utilized, what percentage of the revenue are coming from the third quarter prime inventories such as a homepage, finance page, news page, etcetera. Any metrics, any target will be appreciated. Thank you.

Charles Chao

Okay, three questions. Regarding the ad revenue -- ad network [indiscernible] we launched that new system in preliminary kind of testing mood in the month of September. And I think this new system is designed to better use our inventory in a more effective way to incorporate the data we have collected for our user on the portal as well as Weibo, and to have a different kind of product to sell to our customers, more on performance-based and also more on coverage based -- I'm sorry, more on the coverage based.

And traditionally, I mean that relates to your third quarter related to premium content inventory. I mean we sell most of our advertising [indiscernible] time-based based on premium inventory content. And to a certain degree it was the most effective way to sell these inventories to large brand customers. But on the other hand, I mean we may miss opportunity to utilize our inventories to sell to, you know, the customers, probably maybe more based on coverage, based on performance requirements, so on and so forth. So this is really complementary kind of advertising system we want to launch I mean to better utilize our inventory.

And why we do this ourselves instead of [indiscernible] third-party network. I think in China it's very competitive [indiscernible] market for ad networks. You have a lot of ad networks and a lot of data exchange. And we actually are working with different kind of [DMPs], different kind of network, but different kind of inventory at different locations. But on the other hand, we [indiscernible] want to have our own system to connect with these outside ad networks to get the best pricing and the best, you know, kind of return for our inventory, because [indiscernible] pricing high among old network websites just because our user base are more high end and have more consumption power, and it's viewed as more valuable by most ad networks. So we believe we need to have our own ad network, and then on the other hand, we can connect to other ad networks to get the best results for our inventory.

And the second question regarding the feedback, I don't know yet, I mean because we just started I mean a couple of months. I think, so far, I think, my understanding is it's well-received, but I don't have data in front of me to tell you exactly how do I measure that success. So we'll probably give you more update once we have more data after this system has been [indiscernible] more than a few months, then we can have more data to tell you.

Third question regarding the advertising on portal and [indiscernible] and which inventories are creating more -- which [indiscernible] inventory are creating more advertising. I think historically [indiscernible] obviously automobile is a big one. And then in the last couple of years, FMCG, [indiscernible] pick up, I think it's become equally big, almost -- I mean. And then the third category is probably is e-commerce, internet-related service, which including different kind of, you know, like the communication plus e-commerce, so on and so forth, this is also very big for us. And then fourth probably is financial service.

In terms of prime inventory, I mean our front page, our news channel, our automobile channel and our financial channel are probably the top four. They generate I mean more than probably 60% of the revenue for premium content. And then you have the kind of inventories for different channels and also performance-based inventory based on that content page.

It's also -- but to answer your question, the four locations I mentioned, on the portal front page, news channel, financial channel -- I'm sorry, automobile channel and financial channel are the ones that generate majority of our revenues. I hope that answered your question.

Alex Yao – JPMorgan

It does. Very helpful. Thank you very much. And congratulations on a very solid quarter.

Charles Chao

Thank you.

Operator

Your next question today comes from the line of Ming Zhao from 86Research. Ming, please go ahead.

Ming Zhao – 86Research

Thank you. I have two questions. First question, on the mix between the portal and Weibo, so last quarter's call, basically from what you said, the results show the quarter outperformed your expectation and Weibo underperformed your expectation. My question is about the Q4 guidance. Between the port and Weibo, should we assume portal [indiscernible] and Weibo is something like $50 million range? Has November 11 day benefited your Weibo revenue in the fourth quarter? So that's my first question.

Second question is about your vertical channels. So if you look at the industry, so far it's $5 billion company now. Autohome is going public. So, SINA has quite a few very staunch vertical channels. Do you have any strategy on those channels? Thank you very much.

Charles Chao

Okay, Ming. Let me try to answer your question. In terms of the guidance for fourth quarter, as I said, I mean we had some inventory issues in the third quarter for Weibo, but we're adjusting that. So we'll probably see a more robust growth in the Weibo revenues in the fourth quarter advertising side. And I believe that probably most of the advertising revenue growth for fourth quarter on sequential basis will have to come from Weibo. And I cannot exactly what the number that is, but I will say the vast majority of that growth will come from Weibo. So that number should be high than the one you just mentioned.

And in terms of the (AUDIO GAP) especially in areas of, for example, the automobile, the financial service and [indiscernible] are the ones we're looking to for future [indiscernible] strategies. And we probably will make them more independent going forward and also that we try to expand services for the offerings in these multiple channels. Take the example, the financial channel, we are very influential in China for financial channel and financial news coverage and we have a very large number of high-end users for financial channel. And these days one if the biggest probably trend or fashion in the Chinese internet space is probably rushing into the internet finance area.

And we actually [indiscernible] started to, I mean, look into this area, have a lot of preparation for this particular area. We believe this is a good opportunity. And for storing new area for future growth, especially for SINA, we are very strong in this and with very good user base and traffic. And so we're preparing getting into this area in the near future. And that means we need to have more, I mean, our focus, the vertical strategy for this particular area, and we'll probably elaborate more in the next conference call in terms of exactly we want to do because at this stage [indiscernible] the preparation in this [indiscernible] and the next. And we'll probably launch the financial product by the end of this year and which will be quite interesting I think.

And in terms of another area probably sport and we have a lot of -- we're very dominant in the sports area and we have a lot of live broadcasting materials, content for different kind of sports games like NBA, like different soccer games and Chinese Super League, so on and so forth. And so we're also thinking about, I mean, make this particular more vertical and more deep in terms of independent operations so they can explore business opportunities other than advertising. And this is another area we have preparation for. And automobile, another area of course, I mean it relates to the internet financing, it also relates to e-commerce opportunities in this area we're looking into.

So these areas probably will move, I mean in terms of verticalization, probably than other verticals. But we are looking into different verticals on overall basis to form our strategy for next year. So we'll keep you updated next time maybe.

Ming Zhao – 86Research

Thank you.

Charles Chao

Thank you.

Operator

Your next question today comes from the line of Piyush Mubayi from Goldman Sachs. Piyush, please go ahead.

Piyush Mubayi – Goldman Sachs

Thank you, Charles, Herman. Congratulations on a good set of numbers. Might I just ask your guidance for the fourth quarter where you talked about 190 for the quarter? Now just starting off, you talked about the fact that the bulk of the growth in 4Q will be on Weibo. And when I break it down, it looks to me that you're looking at about a $10 million incremental contribution from Weibo in 4Q versus about $15 million in the third quarter. My first question is, is that the right assessment, the right way to look at it?

The second is, could you give us a better feel for the $20 million from Ali that you booked in the third quarter, how much of it was PC, how much was mobile on Weibo side? And looking out to 4Q, how much of that incremental $10 million, if I did my number correctly, is going to be on mobiles in terms of Ali contribution?

And the third question is, if you could give me a sense of how the core business performed in the third quarter in terms of average time spent and how that's trending into 4Q, I'd be very grateful. Thank you very much.

Charles Chao

In terms of the fourth quarter guidance, obviously you're right, I mean the incremental came in, probably majority will be coming from Weibo. I mean I mentioned about advertising, but even from that advertising there'll be from Weibo for our Weibo-related value-added service like gaming, [MSM] data service for example. And so [indiscernible] incremental will be a fair assessment for advertising will be from Weibo and financial advertising we probably will see -- continue to see a little bit drop in the [SG] business [indiscernible] and Weibo-related value-added service. I mean, so that's relating to the Weibo -- for the revenue guidance for the fourth quarter.

And for the third quarter, I mean in terms of for the incremental revenues for Weibo [indiscernible] come from PC and from mobile, actually I mean, you know, previously we say that [indiscernible] revenue, one-third was coming from mobile already I mean in the first quarter and the second quarter. But in the third quarter [indiscernible] down to 20-something percent for mobile, mainly because Ali's spending was mainly on PC. So that kind of distort picture a little bit. And without Ali's number to be included, I think that number was 50-something percent and did not change too much from previous quarter.

And for the fourth quarter we probably will still see some 20% coming from mobile, mainly because Ali's number is still an important factor. And until they begin to spend more on mobile, I think that number is not going to change that much. But we do expect for next year, I mean if we look at the short term, probably more about getting smaller because of Ali's spending. But for the long term, for next year, we believe Ali will spend more on mobile for next year when their product become more ready for mobile marketing. And so that will change. But over the longer term we believe that, given the inventory and time spent for users, that mobile will become I think the [indiscernible] portion we expect for next year excluding Ali's spend in the mobile should account for more than 50% of our advertising on Weibo.

And I'm sorry, what was the third question?

Piyush Mubayi – Goldman Sachs

The third question was related to underlying growth trends for usage. How is that --

Charles Chao

Yeah. I talked about a little bit in my opening remarks that the time spent on daily basis did not change from previous quarter. I mean there was a pick -- I mean increase on the time spent on the mobile terminals but a decrease on PC. But on overall basis, there was no change for time spent for user. And we don't have enough data to predict what's going to happen in the fourth quarter, but it looks like not changing too much based on our data. I mean we observed in the last, you know, month and a half basically. We will update you next time maybe.

On overall basis, I think people worry about activities are -- I think it's growing slower, but it's still growing basically.

Piyush Mubayi – Goldman Sachs

Thank you very much.

Charles Chao

Thank you.

Operator

Your next question today comes from the line of Alicia Yap from Barclays. Alicia, please go ahead.

Alicia Yap – Barclays

Hi. Yes, hi. Good morning, Charles, Herman and Cathy. Thanks for taking my questions.

My question is also kind of like follow-up on the portal revenue guidance for fourth quarter. So I think, Charles, you just mentioned that [indiscernible] incremental $10 million sequential improvement, that's mainly come from Weibo. But then if we assume that translating portal could be flattish quarter over quarter, but they're still implying on the year-over-year basis your portal revenues are improving like 21%. Is that right on that front?

And then second is related to -- on the advertising -- on the ad prices, just wanted to know, is there any price difference or is there any like more discount for advertising inventory that's dedicated to Ali versus auto brand advertiser on your Weibo?

And lastly, on the use of cash, if Charles or management can comment what are the business opportunity that we are looking for in addition to these financial channels that we are thinking about, but is there any potential acquisitions that we may be thinking about? Thank you.

Charles Chao

So on your first question regarding the guidance, again, and if that what you -- your assumption is right, then you're right. But at this point, at least I will say that the [indiscernible] coming from Weibo and maybe it's possible that it will be a little bit more from Weibo. So I would say, I mean for the -- on a year-to-year basis, there will be increase for sure. But how much that will be, like 21% or in the mid-teens, I don't know at this point because, at the end of the day, depending on customer spending which we would prefer, I mean on which platform basically for the fourth quarter, and it looks like there's going to be year-to-year increase for portal. But how much that will be, I don’t know. I mean I will say at least it will be $10 million. The incremental revenue will be coming from Weibo, the current estimate basically.

Second question regarding pricing, it's difficult to compare the pricing system between Ali customers and our general customers because they use different inventories. And so they have different pricing strategy. And so I don't think these can be compared. But going forward when [indiscernible] more our -- I mean normal inventory, then I think they will be comparable, pricing we can compare. But at this point we're not really comparing discount [indiscernible] to big categories.

And the third question regarding use of cash, yes, I think we do have quite a bit of cash reserves. And we are looking to areas, I mean we may be able to acquire different areas like in the mobile area, in the [indiscernible] area and also in the new media areas, I mean, and so these are areas we're looking to. But we do not have very concrete, you know, large acquisition at this point, but we are, to be frank, we are very actively looking to see if the areas we can expand our business growth over the longer term, and especially for mobile internet, I mean. So this is something that we really become more focused recently and we'll update you next time hopefully if any happens.

Alicia Yap – Barclays

Okay, great. Thank you. Congratulations.

Charles Chao

Thank you.

Herman Yu

Thank you.

Operator

Your next question today comes from the line of [Julian Chung] from Morgan Stanley. [Julian], please go ahead.

[Julian Chung] – Morgan Stanley

Hi. Thank you for taking my questions. I have two questions. The first question is about, in terms of the sales, what percentage is from Alibaba? And my second question is, do you have any -- or do you have any view on the margin outlook?

Charles Chao

What sales?

Cathy Peng

[Julian], can you explain what you mean by sales from Alibaba?

[Julian Chung] – Morgan Stanley

So what percent -- advertising sales from the Alibaba partnership, what percentage is from Alibaba?

Charles Chao

I think we've answered that earlier in the call. As we mentioned, revenues -- Weibo revenues from Alibaba was approximately $20 million this quarter.

[Julian Chung] – Morgan Stanley

Okay, thank you. And my question is, do you have a view on the margin outlook? Thank you.

Charles Chao

Yes, you can see, if you look at our margin in third quarter this year compared to last year, we've significantly increased margins. I think you can expect that fourth quarter we should be at least looking at our current margin now given our revenue guidance.

[Julian Chung] – Morgan Stanley

Okay, thank you. Thanks.

Operator

Your next question today comes from the line of Vivian Hao from Deutsche Bank. Vivian, please go ahead.

Vivian Hao – Deutsche Bank

Hi. Thank you for taking my question. Three questions here. First of all, we see that this quarter the gross margin, especially for the advertising segment, is -- see very significant improvement. And also on an absolute basis, it looks like [indiscernible] is coming down quarter over quarter. Is there any particular reason for this trend? And should we expect this to continue in the next few quarters? This is the first question.

And second question is about, any update on the Weibo inventory? So we understand right now most of the inventories sold are still banner or display ads. Any progress on the [indiscernible] to its new inventory? I'll just ask these two first and then follow up afterwards.

Charles Chao

Maybe Herman can take the first one and I will answer the second one first regarding the inventory. I think on the PC side, I mean [indiscernible] tight in terms of inventory and our mobile still have plenty of inventory we can explore, I mean [indiscernible] still yet to kick off [indiscernible] so we're looking very much closely on this particular areas to improve the efficiency of mobile advertising and also in terms of acquiring more customers to use our mobile [indiscernible] service going forward.

And for the promote tweets, I mean this is the -- I think this is probably refer to our [indiscernible] product which is we call information feed advertising. And this is something, as I mentioned in my opening remarks, we see quite strong pickup in terms of the usage and effective CPM. So we are very rapidly improving efficiency of our performance-based advertising system in the information feed advertising. And so saw the revenue [indiscernible] both in third quarter compared to the second quarter and we probably see more accelerated pace of growth in the fourth quarter.

And this particular product actually is -- currently is being used for our SMEs only. And it's possible that we'll expand this service to our brand [indiscernible] customers going forward. We're working on that. And as you know, that for our -- for that particular product [indiscernible] probably more being used by brand advertisers I mean for the promote tweets product. For us because we already have our brand advertising base, there is something [indiscernible] here is to use different kind of [indiscernible] to the different customers. But over the longer term we will see, I mean, which is more effective way to generate and maximize the return of our inventory and to provide more relevant compelling service to our customers. And so this is something we're working on.

And so overall I will say that this potential promote tweets or we call information feed service advertising does have a lot of potential. And also the mobile areas, they have a lot of potential.

Maybe Herman can help to answer the first question regarding advertising gross margin.

Herman Yu

Hey, Vivian.

Vivian Hao – Deutsche Bank

Yes.

Herman Yu

I didn't quite get -- so your first question was on where do we see the advertising gross margin?

Vivian Hao – Deutsche Bank

Actually it's for the segmental gross margin for advertising, it's quite high for this quarter, and then absolute COGS for the segment is about $55 million versus last quarter about $57 million. We achieved high growth for this quarter on top line for the segment, but then we seem to have a lot of savings on the cost side. Just try to understand what's the cost savings underlying this $55 million.

Herman Yu

Yes. I think you're probably talking about on the GAAP numbers. Actually if you take a look at our earnings release, our worksheet, you take a look at the non-GAAP, because the difference between GAAP and non-GAAP, you have aberrations such as stock comps and so forth. So if you take out those items that we exclude for non-GAAP, you actually see an increase in cost of revenues.

So the second quarter, I believe it was around $52 million, and we actually increased around $2 million into the third quarter. But on a margin-wise basis, on a non-GAAP basis, you're already seeing an increase in our margin from 55% to 63%. And part of the reason is because Weibo revenue is increasing and Weibo has a better margin than our portal advertising.

Does that answer your question, Vivian?

Operator

Your next question today comes from the line of Tian Hou from T.H. Capital. Tian, go ahead.

Tian Hou – T.H. Capital

Hi, Cathy, Charles and Herman. My question is related to Weibo. People use Twitter as a reference or company for Weibo. So [indiscernible] IPO, and so [indiscernible] two questions related to Weibo. One is, so in the advertising inventory in the news feed, Twitter is about 10%. So that's how they manage [user experience]. So I wonder how [indiscernible] in terms of managing Weibo news feed advertising inventory in order to balance user experience and advertisement. That's the first question. I will have a follow-up question after this.

Charles Chao

Hi, Tian.

Tian Hou – T.H. Capital

Hello?

Charles Chao

Hi, I'm here.

Tian Hou – T.H. Capital

Yes.

Charles Chao

Regarding to this IPO, we saw it was a very successful IPO and the market gave this particular company a very positive view for the future. It looks like it's trading very well right now.

And to answer your question, I mean, yeah, Weibo is similar, but the difference is that this is -- Twitter is pure Twitter and we have both businesses. Both business have synergies. So we'll continue to look into the possibility in the future to see whether a spinoff is more valuable to generate shareholder value, that's one, and also create more synergies going forward. So these are two considerations we look into for our decision here. But I can tell you at this point we have not made any decision yet.

And the second question regarding the -- how to manage the news feed, we call information feed, I mean kind of, you know, inventories. I mean we don't have a rule here in terms of whether 5% or 10%, but what I can tell you is we're under the number at this point. And I think the key is not really what percentage of inventory will be dedicated to advertising or marketing in the news feed. But the key is whether, I mean the user experience can be, I mean, not impacted too much, and also that I think the effective way of doing the campaign in the news feed is to make the advertising more relevant, make the advertising more like a content, make the advertising more I mean relevant to user participation and their retweet, so on and so forth. I think these are the targets we're looking to -- factors we're looking into, but we do not actually put a specific percentage here. But as I said, I mean [indiscernible] under that number.

Tian Hou – T.H. Capital

Okay. So the question related to Weibo is about, you know, Twitter has a new service, actually closed before IPO, it's called data mining service, provide some information [indiscernible] their own, you know, the [indiscernible] information, and then come up with something useful and provide enterprises. And despite [indiscernible] a major portion of the total revenue, I wonder [indiscernible] what's the -- what's our current [indiscernible] that front.

Charles Chao

I think this is a good question. We do believe that the data from social media platform is very valuable. And once we obtain more and more data, over the period and we know more about the people, know more about the interest, know more about the related information through our connected website and services. And because, you know, Weibo is an open platform. We connect to tens of thousands of different applications, websites and sort of connectors. And so our -- we do have enormous number, amount of information and data. The key is how to use this data for this kind of services and different purpose. And we already have come up with our own data products. And in fact, we have already started to monetize some of the data service going forward.

And so you're going to start to see revenue category in this area starting from this quarter on non-advertising category right now. But the key is that, you're right, I mean this is a service which got a lot of potential. And we believe that our online data combined -- if it can be combined with another offline data in the vertical areas [indiscernible] can be connected like purchase data as we have with our partnership with Alibaba for example. So we've got payment data with some customers. I think these data on overall basis, the data mining could be very valuable, not only for our own service but also for the services we provide to other companies, other service providers.

So this is area we look into very closely and hopefully we can update more next year -- in the next year's conference call.

Tian Hou – T.H. Capital

Thank you. That's all my question.

Cathy Peng

Operator, we'll take one last question and then --

Operator

Your final question today comes from the line of Cynthia Meng from Jefferies. Cynthia, please go ahead.

Cynthia Meng – Jefferies

Thank you, Charles, Herman and Cathy. And congratulations for the good set of results.

I have two questions. Number one is, can you give us some more color or elaboration on the progress of the jointly developed social e-commerce product with Alibaba. Are you seeing any signs of increase in conversion rate for transactions?

Number two question is, can Charles give us some more color on the promoted tweet, the promoted feed, information feed product? What is the percentage of Weibo advertising revenue that is coming from this new product? How do you expect this will contribute to total Weibo revenue going forward? Thank you.

Charles Chao

So put in this way, I mean I already talked a lot about that promotion, promote tweet or our information feed based advertising revenues. And just to give you some more color is that for the third quarter, that number was over 10% of our total Weibo advertising revenues, and we hope that will go out. And we don't know exactly what percentage that will be. And hopefully next year we'll get to like [indiscernible] percent of our total Weibo advertising revenue, that's very possible we believe.

And another -- for your first question about the social commerce, that actually is a long-term project. It's not something that can create revenue immediately. But we believe that combining social platform with e-commerce platform will be able to create a lot of social commerce opportunities. And both companies actually are working very closely on this project. For example, we work -- within Alibaba Group you know there is a website called [Gyubasa] which basically the group buying website for merchant banks. And it is doing very well, very influential in China, creates a lot of revenues within that group. And we work with them very closely because we believe that this kind of commerce activity combined with social platform will encourage a lot more people to participate in the commerce process in terms of ordering the quantity of the product, reducing the unit costs, and also that will make the purchase more predictable. And overall it will increase the efficiency of the commerce activity and reduce the cost of the entire commerce activities, and which eventually will benefit the consumers we believe.

And so these are the examples we are working closely here, and actually probably we'll [indiscernible] product by the end of this year, coming out from the end. And hopefully next year we'll do more.

But as I said, it will probably need patience here because this is not something that we can create immediate effect, but that we firmly believe both companies will work -- work together very closely will create new models in this area that will make the commerce more efficient and eventually will benefit the consumers I mean on overall basis. Thank you.

Cynthia Meng – Jefferies

Thank you.

Operator

Ladies and gentlemen, that concludes today's question-and-answer session. I would now like to hand the conference over to Ms. Peng for closing remarks.

Cathy Peng

Okay everyone. That concludes our call for today. Thanks for joining us. We'll see you next quarter.

Charles Chao

Thank you.

Operator

Ladies and gentlemen, that does conclude the conference for today. Thank you all for your participation. You may all disconnect.

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