SINA Q3 2006 Earnings Call Transcript

| About: Sina Corporation (SINA)

SINA Corporation (NASDAQ:SINA)

Q3 2006 Earnings Call

November 2, 2006 8:00 pm ET


Chen Fu - Investor Relations Manager

Charles Chao - President, Chief Executive Officer

Herman Yu - Acting Chief Financial Officer


Lu Sun - Lehman Brothers

Richard Ji - Morgan Stanley

Wallace Cheung - Credit Suisse

James Mitchell - Goldman Sachs

Dick Wei - JP Morgan

Safa Rashtchy - Piper Jaffray

Jason Brueschke - Citigroup

Leah Hao - Thomas Weisel Partners


Good day, ladies and gentlemen, and welcome to the SINA third quarter 2006 earnings conference call. At this time, all participants are in a listen-only mode. We will, however, be facilitating a question-and-answer session towards the end of this conference.

I would now like to turn the presentation over to your host for today’s conference, Ms. Chen Fu, Investor Relations Manager. Please go ahead, Madam.

Chen Fu

Thank you. Good morning. Welcome to SINA's earnings release for the third quarter 2006. Joining me today are our President and CEO, Charles Chao, and our Acting Chief Financial Officer, Herman Yu.

This conference call is also being broadcast on the Internet and is available through the investor relations section of the SINA website.

Before the management presentation, I would like to read you the safe harbor statement in connection with today’s conference call.

During the course of this conference call, we may make forward-looking statements --statements that are not historical facts, including statements about our beliefs and expectations. Forward-looking statements involve inherent risk and uncertainty. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Further information regarding these and other risks is included in SINA's annual report on Form 10-K for the year ended December 31, 2005, and its recent quarterly reports on Form 10-Q, as well as in its other filings with the Securities and Exchange Commission.

Additionally, the non-GAAP and comparable GAAP information are contained in our earnings release, which can be found on our corporate website at

Following management’s prepared remarks, we will open the line for a brief Q&A session. Now, let me turn the call over to our President and CEO, Charles Chao.

Charles Chao

Thank you. Good morning, everyone, and welcome to the SINA 2006 third quarter earnings conference call. I am pleased to report another quarter of strong financial performance, with record advertising revenue and better-than-expected mobile revenues. But it was also a quarter of much-improved operating margin as we were able to convert the entire incremental revenues into incremental profits.

Our third quarter results are further testament of our strengths as the leading online advertising platform in China, with strong brand, secure content offerings, and a desirable user demographic.

We continue to see accelerated adoption of online advertising in the China market, and believe that this momentum will continue in the next few years. We are also becoming more confident that SINA is in a good position to ride the wave.

Now let me talk about the business highlights.

For the third quarter, SINA reported total revenues of $56.1 million, up 13% year over year and above the high-end of our original guidance of $54 million.

Brand advertising revenues for the third quarter were $32.7 million, up 42% year over year and 11% quarter over quarter, reaching the high-end of our original guidance of $32 million. Excluding international markets, advertising revenues from our China operation grew 46% year over year for the third quarter. For the first nine months of 2006, advertising revenues grew by 41% year over year and advertising revenues from our China operations grew by 44%.

Our lead in brand advertising revenues over the second-largest player in China has been increased to 56% in the third quarter, and we believe we will continue to increase the gap in the future.

Given our strong momentum, we are raising our year-to-year advertising gross target for the year 2006 to approximately 40%, up from the 35% to 38% range we revised in the previous quarter.

Brand advertising revenues accounted for 58% of total revenues for the third quarter, as compared to 46% in the same period last year, and 55% in the previous quarter. As we continue to focus our efforts on building the best content offerings and most robust online advertising platform, our revenue mix will continue to shift in the future in favor of brand advertising.

Our hugely successful coverage of the 2006 FIFA World Cup event and related sales and marketing efforts was partially responsible for the strong results in brand advertising for the third quarter, as part of the World Cup revenues was booked in the third quarter.

As I mentioned earlier, we continue to see an acceleration of adoption of online advertising in the China market, with a significant increase in our advertiser base. For the third quarter, the total number of advertisers reached 703, as compared to 571 advertisers in the same period last year, and 633 advertisers in the previous quarter.

For the third quarter, automobile, real estate and information technology continue to be the three largest contributors for our online advertising revenues. Combined, these three categories accounted for approximately 53% of our total advertising revenues for the third quarter, as compared to 51% in the previous quarter. We expect these three categories will continue to be the pull of our online advertising business, as we are increasingly becoming the best media platform to reach nationwide, high-end consumers in China.

Our ability to leverage our brand power and our experience in integrating our content, sales and marketing in providing total marketing solutions for consumers to our customers has and will continue to enable us to grab a large portion of advertisers’ budgets in these industries.

Fast-moving consumer products and the financial service has also contributed significantly to the growth of our advertising revenues in the third quarter. In the third quarter, advertising revenues from rich media formats reached up to 5% of our total advertising revenue. With further increase of broadband adoption in China, we expect rich media advertising format will become an important growth driver for online advertising in the future.

To better understand the future development of the Internet advertising market and the [inaudible] strategies to take advantage of the market trend for SINA, it is important to examine the Internet advertising in the context of China media and the economic environment.

According to a recent research report, the Internet has become the third-largest mainstream media in China, behind TV and newspaper in terms of reach, with a 20% penetration rate in urban population. The number of Internet users in China is expected to double again in the next five years, with increased hours spent on Internet media.

Considering the Internet’s main function as an information and entertainment platform in China, it is likely that brand or display advertising will remain the dominant form of online advertising in the next three to five years.

SINA is no doubt in the best position to take advantage of this market change. Not only are we the most influential Internet media company in China with a large user base and traffic, but we also generate most of our traffic from our high-quality content channels, which is very different from most Internet products around the world.

Our strong media brand, together with high-quality content traffic, fits well with the needs of brand advertisers, which explains why 23 out of 25 top brand names, both international and domestic in China for the year 2006, according to Fortune Magazine, have selected SINA as their online marketing product.

Accordingly, our focus has been devoted to further enhance our leadership in our web content offerings, both bringing exclusive content and user-generated content, and to extend our brand power.

Here are some highlights for the third quarter I would like to share with you.

First, about SINA Sports. SINA Sports has always been the dominant leader in China Internet space, with a significant lead over our second closest competitor. Due to the huge success of the 2006 FIFA World Cup, as well as the larger opportunities provided by the upcoming 2008 Beijing Olympic Games, major portals in China have been competing more fiercely over the premium content in the sports area. During the third quarter, we took significant steps to enhance our product and content offerings for our sports channel.

In August, we signed multiple year contracts with the European Football Association to become the Chinese website partner for its official website,, and to host its official Chinese website on SINA. We also obtained video rights for both Internet and mobile for the popular European Championship Cup for the next three years.

In addition to our partnership with ESPN, we have secured exclusive live video broadcasts and the VOD rights for the entire 125 games for the Europe Championship Cup in China.

In September, we announced a strategic partnership with Inter Milan Football Club, a championship club for Italian Premium Football League, and have become the host of Inter Milan official website in China.

We have also secured a similar strategic partnership with the Chelsea Football Club, a championship club for the English Super league. In addition, we have 10 exclusive live broadcasting rights on Internet TV for football games of Scottish Super League, French Premier League, and the Dutch Premier League, as well as the games of top football teams for English Super League in China.

In October, we secured exclusive video rights for Spanish Primera Football League and Italian Primera Football League.

Through these initiatives, we have pretty much dominated the content rights for European football, which have always been among the most popular sports events among Chinese sports fans.

Also in October, we reached a multi-year agreement with Football and Basketball [Premier], two of the most popular Chinese sports newspapers. These two newspapers will provided content to SINA on an exclusive basis in the next three years.

We believe that our significant efforts in obtaining more premium and exclusive sports content will help us to maintain our dominant position in sports. In fact, despite the strong efforts taken by our competitors in the market, we have managed to increase the gap of sports traffic between us and our closest competitor in the past ten months, with a ratio of two to one at the beginning of the year to a ratio of three to one in October.

We intend to invest more in the sports area in the future to further dominate Internet sports in China, and lay a good foundation for our 2008 Beijing Olympic Games coverage.

Talking about the Olympic Games, we recently launched our Olympic channel and began to provide coverage for Olympic related events and activities. We have secured exclusive content rights with several major international news organizations for the 2008 Olympic Games coverage, and we plan to cover the Olympic Games in multiple languages, including Chinese, English, French, Spanish, and Arabian.

The second highlight I would like to talk about is our video initiatives. With increased broadband adoption in China, video applications have become more and more popular among Chinese Internet users. During the third quarter, we re-launched our video broadband channel with the most comprehensive video content offerings among Chinese Internet companies.

SINA video channel now offers SINA TV, a platform based on P2P technology, with over 30 channels providing video programs around the clock.

SINA VIP Chip, a SINA produced video based chat program available on both P2P and VOD platforms. SINA DV, the largest community for user-produced video programs.

We have established content partnerships with over 50 TV stations and video production houses in China and overseas, including CCTV, Shanghai Media Group, Dragon and Beijing TV, and PhoenixTV, and many of them are on an exclusive basis.

In addition to the video broadband channel, we launched our video search service with a video sharing platform similar to YouTube, during the quarter. The platform allows grassroots Internet users to upload and share video programs. So far, this new service is well-received in the market.

The third area I would like to highlight is our continuing cash flow to maximize user-generated content. We continued to invest in our blog service during the third quarter. SINA blog service continued its phenomenal success with daily page views reaching 100 million in October, up 60% from June. Daily unique visitors have also increased to 3 million.

With our current scale and the popularity of our blog service, together with our newly launched video sharing program, we are on our way to build the largest community for user-generated content in China.

Now let me turn to our mobile value added service. Due to the change in China Mobile’s operating policies in early July, we had expected a significant sequential decline in our MVAS revenues at the beginning of the quarter. The actual results were much better than we had expected. Total MVAS revenues amounted to $21.8 million, as compared to $22.4 million for the previous quarter, a modest 3% decline on a sequential basis, beating both internal and external expectations.

Our better-than-expected results were achieved through a fixed shift of our marketing resources to less policy-affected IVR revenues and the strong growth of MVAS revenues with China Unicom.

In the third quarter, MVAS revenues from Unicom accounted for 33% of our total MVAS revenue, as compared to 19% in the previous quarter. In terms of revenue by category, our IVR revenues increased 184% sequentially to $5.7 million; SMS revenue declined 23% sequentially to $12.4 million; MMS revenue declined by 22% to $0.9 million; and WAP revenues declined by 21% to $1.4 million.

Because China Mobile rolled out its new operating policies gradually in different provinces during the third quarter, the impact of such policies were only partially reflected in the Q3 results. We expect full negative impact from these policies in the fourth quarter.

In addition, China Unicom has also started double cancellation enforcement in September, and we expect revenues for China Unicom will also decline in the fourth quarter. Hence, we expect high sequential decline rates for our mobile business in the fourth quarter. Our non-advertising revenue guidance for Q4 implies a sequential decline in middle-teens for mobile-related service. This is assuming no additional new policies will be issued by China Mobile or China Unicom. We will keep monitoring these developments and will inform investors if there is any change to our current estimate.

In general, we are not positive on the mobile business in the current business model. There are possibilities that the mobile operators will continue to issue new policies which may be detrimental to our mobile service. In the near-term, we will be limiting our investment in the mobile business and focusing on improving the profitability by reducing our fixed costs and the less effective promotion activities.

In the third quarter, we reduced promotion costs for mobile by approximately $1.3 million and cut down fixed costs. As a result, our profit from mobile has actually increased sequentially, despite a decline in revenues.

We will continue to focus on profitability of our mobile business in future quarters.

We continue to believe that it is important for SINA to maintain a strong practice in wireless business, in anticipation of the launch of 3G mobile network in China. Although there is uncertainty in terms of future mobile Internet up-linking model, we remain positive we will be able leverage our Internet strengths in the mobile Internet era.

Lastly, I would like to talk about our search. During the quarter, we continued to work on improving our search technology, and have managed to double the index page for our web search. As I mentioned earlier, in conjunction with the launch of our video sharing platform, we also launched our video search service, our iAsk platform. We are still in the process of reviewing our overall search strategies, and we will come to a conclusion in the fourth quarter.

That is all I have. Now, let me turn to Herman for the financial highlights.

Herman Yu

Thank you, Charles, and thank you all for joining our conference call today. Let me briefly review the other key financial highlights for the third quarter of 2006.

As Charles mentioned, we are very pleased to report another quarter of solid financial performance, with total revenues of $56.1 million, an increase of 4% sequentially and 15% year over year.

Our advertising business in the third quarter grew 11% sequentially and 42% year over year. The strong growth of our advertising business in the third quarter came primarily from China, which grew 46% from the same period last year.

On a year-over-year basis, the number of our advertising customers in China in the third quarter grew 37% and spending per advertiser grew 6%.

Turning to our non-advertising business, for the third quarter of 2006, our mobile business generated revenues of $21.8 million, which represents a decline of 3% sequentially and 10% year over year. We had expected a steeper decline during the quarter. However, through diligence and strong execution, our mobile team managed to partially offset the impact arriving with the operator policy changes. As Charles mentioned, we expect our mobile revenues to experience further decline next quarter.

For the third quarter of 2006, our non-advertising revenues, mainly search and other fee-based revenues, were $1.6 million, which represents a decline of 13% sequentially and 39% year over year.

As mentioned on the previous call, the decline in search revenues from the second quarter represented the duration of existing customer agreements on our old search engine, which we are not renewing.

Since the beginning of this year, we have been pushing our new search engine, iAsk, the service of which is currently being offered for free. We expect to begin monetizing iAsk sometime next year.

Turning to gross margin, pursuant to FAS-123R, we began to include stock-based compensation in our cost of revenues and operating expenses, starting January 1, 2006. Today’s discussion includes non-GAAP measures, which excludes 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 be indicative of our core operating results and business outlook.

For further explanation of our non-GAAP measures, please refer to our earnings release.

Our non-GAAP gross margin for the third quarter of 2006 was 65% compared to 64% last quarter, and 68% last year. Our non-GAAP advertising gross margin in the third quarter was 67% compared to 66% last quarter and 68% last year.

A quarter-over-quarter advertising gross margin improvement was due to revenue growing faster than production costs.

Non-GAAP gross margin for our wireless business was approximately 62% in the quarter, compared to 60% last quarter and 66% last year. The sequential increase in wireless margin was primarily due to product mix, as IVR typically generates a higher gross margin than SMS.

The year-over-year decrease in mobile gross margin was mainly due to increased operator and content costs. We anticipate continuing increase in operating and content costs, thus further [inaudible] our wireless margin over time.

Turning to operating margin, our non-GAAP operating margin for the quarter was 24% compared to 21% last quarter and 20% last year. Improvement in operating margin was due to strong revenue growth as well as cost control. Non-GAAP operating expenses for the third quarter was $23 million, compared to $23.2 million last quarter and $23.8 million last year. Compared to last quarter, marketing expenses decreased by $1.5 million, which was partially offset by higher bad debt expense, primarily relating to Asian Mobile receivables and increased payroll related expenses.

For the third quarter of 2006, we recorded a net income of $10.7 million compared to $9.1 million last year, and $10.4 million last quarter. Non-GAAP net income for the quarter, which excludes stock-based compensation and other items, was $14.6 million, an increase of 19% sequentially and 46% from last year.

Non-GAAP net margin for the third quarter was 26% compared to 23% last quarter and 20% last year.

A few other points about balance sheet and cash flow. As of September 30, 2006, cash, cash equivalent, and investments of marketable securities were $345 million, compared to $313 million last quarter and $301 million at the end of last year. Cash flow from operations for the quarter was $27.7 million.

Let me turn to our guidance for the fourth quarter of 2006. We are targeting total revenues of $53 million to $56 million. For our advertising business, we are targeting $34 million to $35 million, which increases our fiscal year 2006 growth to between 39% and 40%. Previously we had targeted a fiscal year growth of 35% to 38% year over year.

For our non-advertising business, we are targeting between $19 million to $21 million.

Like last quarter, due to the uncertainties in the mobile sector, we will not be giving out a target range for net income.

This concludes the written portion of our call. We are now ready for questions. Operator.

Chen Fu

Operator, we are ready for the Q&A.

Question-and-Answer Session


(Operator Instructions)

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

Lu Sun - Lehman Brothers

Good morning, everyone. Congratulations on a set of excellent results. I have two questions. One is on your advertising business. Do you anticipate monetization of your popular blog service, and also possibly your iGame platform going into 2007? Secondly, on the wireless data service business, do you think that the current margin structure will be sustainable going into the fourth quarter and also into 2007, that you can actually continue to reduce marketing costs and then realize relatively stable revenue situation going forward? Thank you.

Charles Chao

On your first question regarding the monetization of the blog, I think we have set a plan in the last several months is that we are not going to monetize our blog service in large scale in this particular year. Having said that, we are already starting to see more and more integration of our blog service into our integrated marketing package to our existing customers.

We see a lot of these brand advertisers and especially with big brand names, who like to have more integrated marketing solutions, would like to have user participation in their marketing campaign. We see more of these services have incorporated the blog service, which is using the user participation in ad campaigns. Indirectly, I would say we have already started to monetize our blog service.

In the area of iGame, we have not talked about iGame for a long time because it has been a very small operation for us for the last couple of years. We started, actually, to monetize it at the beginning of this year. We have seen very insignificant revenues from that particular platform, so we do not have too much expectation for that part of the business. Instead, we are probably scaling down our iGame operation right now.

Regarding your second question, for the wireless margin going forward, I think Q3, our margin was particularly strong in the wireless area, for two reasons, of course, our return on IVR seems like has a high gross margin than our previous business, and so this is a plus for Q3. Also, we were able to do our marketing more effectively in Q3, so we were able to reduce our marketing costs, but still achieve a significant revenue base for Q3.

But going forward in Q4, I think in terms of IVR, we are not expecting further increase, at least in Q4, just because there is a capacity issue for IVR, as well as the fact that there are a lot of fall-outs for IVR on TV, and that in fact will reduce the effectiveness of the IVR campaign with current ratings, so the return on investment on these advertisements has been decreasing in Q4.

For other product categories, we do not see too much change, actually. In general, I think we will see some decline in gross margin and profit margin for the wireless business in Q4.

For the next year, our current estimate, I think we are still going to see a little bit of a further decline in gross revenues and operating margin. We do not have enough information to give you a very accurate estimate at this point.

Lu Sun - Lehman Brothers

Thank you. Just a little follow-up. You actually booked $1 million bad debt expense from writing down some of the receivables on the wireless side and service side. Do you see further risk going forward?

Charles Chao

Actually, we view this as more of a one-time event. Historically, we actually have very little bad debt from the wireless service. This time, actually, some of the old Asian accounts become too old that we need to provide reserves for those Asian accounts. In reality, there is a good chance we may collect a good portion of the receivables in the future, just because our relationship with mobile is pretty clear that it is just a matter or procedure for tracking these receivables. For our accounting policy, we have to provide that reserve in Q3, so I cannot say for sure, but most likely, not going to have a repeat impact in the future quarters.

Lu Sun - Lehman Brothers

Thank you very much.


Your next question comes from the line of Richard Ji with Morgan Stanley. Please proceed.

Richard Ji - Morgan Stanley

Two questions. Number one is that we noticed recently you have expanded your advertising inventory on your homepage. I am just curious about your pricing trend going forward, especially in the early next year, when you typically raise your advertising price. Given the ad inventory increase, will you keep your advertising rate more or less flattish, or are you going to further raise your rate? I have a follow-up.

Charles Chao

On the advertising inventory and the pricing, actually, we have not really added too much inventory on the front page. Rather, we just did some adjustment on the locations of the advertisements inventory.

In terms of pricing, I know we have talked with investors many times that we typically raise our price every two quarters, so typically we raise price in Q2 and Q4. So we are going to have another raise this quarter, although not of a very big magnitude.

Going forward, I think we will still see a possibility, enough room to further increase our price in the advertising area, and especially for our prime channel inventories, as our page view has been increasing and the user base has been increasing. I think the demand for our prime channel inventory has also been increasing.

There are two ways for us to raise our price. One obviously to raise absolute listing price. The other option is to increase the location of different advertising inventory, so different advertisers can use the same location when people refresh their page, on that particular page. So indirectly, it will help us to increase our pricing. This actually is more like a model between time-based advertising and CTM based advertising.

We are doing more and more of these kinds of locations to try to utilize our inventory better for advertising.

Richard Ji - Morgan Stanley

That makes sense. The second question is regarding your mobile value added service. Obviously it performed much better than the street expected. Next quarter, we are going to see some slide. Overall, when do we expect the mobile operation for your company will stabilize?

Charles Chao

I think at this point, we do not have enough visibility -- we have enough visibility for Q4 but we do not have enough visibility for the quarters beyond Q4. The reason being that in Q4, we pretty much saw the performance we already had in October with all of these policies being fully implemented already in China, so we have a good feeling about how the finish will perform, assuming no additional policies are coming out in the rest of the quarter.

But beyond Q4, it is difficult because we have a mixed picture about the mobile business. On the one hand, I think that China Mobile, we see the business from China Mobile is sort of stabilizing a little bit, but Unicom just started in September. We actually see more decline in the Unicom business, so it is a mixed picture and we probably will have a better answer and better visibility by the end of this quarter to talk about next year.

In general, as I said many times in the past, we are not that positive about this business model, so in general, my estimate is that it is going to further come down in the next few quarters. The only thing we cannot say, I cannot say for sure is the magnitude of the decline.

Since in Q3 and in Q4, the declining rate has been less than we have expected, but it is hard to make a call for next year. In general, I think it is going down.

Richard Ji - Morgan Stanley

Thank you. Again, good quarter.


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

Wallace Cheung - Credit Suisse

Good morning. There are two questions. First of all, regarding the rich media, do you have any kind of sense of the trend going forward, say as a percentage of the total advertising revenue? Also, how would you try to clamp down some of these piracy issues in China, if someone is trying to compete against you by this [inaudible].

Second question is regarding the paid search. When you talk about you are going to reveal your strategy going forward, does that mean you are trying to develop, still continue to develop your own technology, or do you mean trying to think about other, partner with other search engine partners? Thank you.

Charles Chao

I did not quite get the last part of your first question about the piracy issue. What do you mean?

Wallace Cheung - Credit Suisse

You have been signing up quite a lot of --

[Multiple Speakers]

Wallace Cheung - Credit Suisse

Yes, and then I am concerned about the piracy issues in China in the Internet market.

Charles Chao

First of all, rich media advertising has improved video advertising not only on the video content but also in the normal, text-based channel. You have these pop-up windows for the video advertising on a lot of our prime channels. So that applies to both inventories. So rich media in general, I think we see more adoption here, primarily because the network speed has been improving significantly in China with more adoption of broadband.

This Q3, we clearly see a big pick-up in our rich media advertising. I think there are two factors. In general, rich media advertising will become more and more popular in the future, for the reasons I just talked about.

On the other hand, rich media advertising currently is being more used for automobiles and for the fast-moving consumer products. Fast-moving consumer products has seasonality. Typically, they are very strong in the summer time and weaker in the winter time, so you have a seasonality factor for that business.

In general, I think it is going up in the future, but we probably will see the rich media business double next year in 2007 compared to 2006, at least to say, but there will be seasonality. You will see fluctuation between quarters. That is what I meant.

In terms of piracy issues on the video content, this is a big issue when you apply P2P technology in China. In general, we will try to secure the video content we are offering as much as we can by securing, by protecting the piracy issue against these big players in the market, but it is difficult probably to deal with the smaller players who use P2P technology to try to take the video content away from the major players in the market.

So it is not an issue -- it is an issue that currently people do not have a very good solution for, but in general, as long as the big players -- I am talking about these major portals, these major verticals, do not do that piracy, I do not think the impact will be significant on us, because usually these big platforms will attract much more users than smaller companies. So for small companies, currently, I do not think we have any solution and neither do other companies have solutions at this point.

Your second question about the search development, I think we will review strategies to decide in terms of web search, whether we will continue to invest a lot more money in the web search area to continue to use our own search engine or try to cooperate with other leading search engines. At this point, we have not really made a decision yet, but in the mean time, we continue to invest in such technology. As you have seen, we did launch a new search portal, like mobile search, blog search, and a video search in this quarter.

I think all of these search applications will be very critical for our product applications in the future, so it is not a matter of will we terminate the entire search business. It is only a matter for the portal web search, whether we will continue to use ours versus a leading search engine. Does that answer your question?

Wallace Cheung - Credit Suisse

Yes, just a very quick follow-up on the video costs. How much of the video acquisition costs did you spend in the third quarter?

Charles Chao

I think if you look at the cost of advertising, you will see an increase of about $1 million, I guess. I would say more than half of it relates to the content acquisition.

I think going forward, as I said before, that we are going to increase our content costs quarter by quarter, but that we will try to control the increase in a way that will maintain a similar gross margin for advertising business in the next year or two. So you will expect the number of content costs will go up, but on the other hand, we will try to control it in a way that it will maintain current margin for the advertising business.


Your next question comes from the line of James Mitchell with Goldman Sachs. Please proceed.

James Mitchell - Goldman Sachs

Thank you. Actually, most of my questions were asked already. I just noted you still have an associate charge. What is that related to now that you have discontinued [inaudible]?

Charles Chao

You mean the one-time charge?

James Mitchell - Goldman Sachs

No, I am talking about the equity loss on associates?

Charles Chao

Okay. There are two charges. One relates to the Sun TV investment, a further write-down of our investment there because the share price came down further this quarter. Another one actually relates to a very small investment we made a couple of years ago, I believe, in an e-learning school. That was a very small investment, and we did not have too much returns on that investment so far, so we decided to terminate that entity in Q3. It was a small write-off. I think it is a little bit over $100,000.

James Mitchell - Goldman Sachs

Then, just more generally, it looks like for full year, you should do 39% to 40% branded advertising growth. I guess it is early to say, but in general, would you expect a comparable 30% plus advertising growth rate the following year, or you do not have enough evidence yet?

Charles Chao

I think that is a difficult question, James. In general, I said that we are pretty confident that the advertising market in China will do well, at least in the next couple of years, and you see all these factors to support that. The economy is doing very well and in general, the advertising market is growing very fast, so online adoption actually is faster.

In general, we are confident, but in terms of absolute percentage, it is hard to say. 30% probably is a comfortable number, but beyond that, it is hard to say at this point.


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

Dick Wei - JP Morgan

Just two quick questions. The first one is, could you provide us with some traffic data, like overall page view growth, et cetera? Secondly, I wonder, do you have any plans to invest into other business besides the core advertising and the mobile service?

Charles Chao

In just the page view, we do that probably every six months, so we probably would not disclose page view this quarter. In general, it has been increasing, but it is difficult to compare June to September for this particular quarter, because June we had the World Cup, we had some peak traffic because of the season for high education in China. We had a very high traffic in the education channel, and there are some other factors.

Basically, we are going to do that on a six-month basis for page views, the number disclosure.

In terms of investing in other business, our current plan is to invest in areas that was surrounding our core advertising business, so whatever we do we will be investing in content in the areas of the product that will generate more traffic and user base. So we will support our advertising business in general.

Mobile will continue to be part of our business, but we do not have a plan to get into other big business categories at this point.


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

Safa Rashtchy - Piper Jaffray

A couple of questions on advertising again. Charles, as we look at your growth rate over the past two quarters, it almost seems like you are hitting an inflection point. [inaudible] in terms of the overall year over year growth and you are now comfortably in the 40%. Has something happened in the market or have you gained share? Or are these kind of two really good quarters? I am trying to understand if this level of growth is the new level that we should be looking at, or just some external factors or market conditions helped you grow this fast.

For example, just to give you -- maybe you could help us with it, your advertiser growth was very high in this quarter. Could you tell us what helped with that? Have you had an increase in sales force or just increased adoption by a new type of advertisers? That would be helpful, and I have two follow-ups, if I may.

Charles Chao

That is a long question, Safa. For the advertising market, I think in general we believe that we feel this is a much better market this year versus last year, and we clearly see that there is a lot more allocation of budgets to Internet marketing this year from a lot of companies, and also in general, we see new customers from different industries. I mean, as I mentioned in the call early on that if you talk about the 25 top brands in China, and 23 of them have become SINA customers, so it is a big coverage in terms of different industries, international and domestic.

Clearly, if you ask me, I think the general market is doing better and more Internet adoption and more online advertising adoption in China in general.

I think if you talk about comparison to companies, it is difficult to say, because some of the companies have high base, some of the companies have a low base, and some companies have similar base -- the difference maybe is due to execution or due to the traffic or the brand. There are a lot of factors.

In general, I think we feel pretty comfortable in terms of what we have been doing and what we have achieved, and we are comfortable with the 40% level for the entire year and, as I said in the previous answer, it is difficult to estimate the growth rate for next year at this point, but in general, as I said, there will be more allocation to Internet budget next year and the next few years, and also, there will be more advertisers coming to the website.

Safa Rashtchy - Piper Jaffray

On the search side, I understand that you have said for some time now that you are considering various options and what is the best course for you, and search is becoming obviously a pretty major area. Could you give us color whether, for instance, in 2007, we could see some noticeable revenues from search, whether it is through your own initiative or through partnership with someone else? What level of spending do you plan to do on search?

Charles Chao

In terms of search revenues, what is happening this year is that we kind of stopped assigning the search contract at the beginning of the year, so that the search revenues have seen, throughout the year, from Q1, Q2, Q3, Q4 , it has been declining because we just amortized our existing contract, so it was a big bounce at the beginning of the year, gradually coming down.

So if we are not doing anything new starting on January 1, the search revenue will go away, basically. That is the facts. So next year, either we are going to basically work with a leading search engine to use their auxiliary system to get the revenue by selling the inventory, or we will start to monetize our iAsk search engine next year. We have seen some positive improvement in our iAsk search engine, as I mentioned in the call. We doubled our index page this quarter and we also started to roll out a lot of other search service, so indirectly, they are helping our web search.

In any case, next year in Q1, probably we will start into a very low numbers, but it was gradually slowing in the remaining year.


Your next question comes from the line of Jason Brueschke with Citigroup. Please proceed, sir.

Jason Brueschke - Citigroup

Thank you. Maybe I will just start by following up on Safa’s question on search, and maybe just talk about the search market in general and less so your business. We saw Sohu had disappointing results in their search business. Baidu disappointed the street in some respects with respect to their outlook for search revenues. Charles, could you just give us your comment, is the search market slowing in China in general, or are those largely company-specific issues and search should continue to grow at really hyper rates over the next couple of years?

I know previously you were very bullish on brand advertising and you indicated that will continue to be the dominant form of online advertising, so I would just love to get your views on how the market is developing in terms of search.

Charles Chao

I think we are not the experts on doing the search business in China. I am not in a position to give you a very, very good answer. I just try to do my best here, okay?

I think if you look at the so-called search revenues for each company, whether it is from the companies you just mentioned or from us or from other companies, I believe what is included in that search revenue is very different from company to company. So the decline of one company or increase of another company is made of very different reasons, so it is difficult to generalize the factors for a big company’s performance, whether it makes a positive. That would be my observation.

The second observation is that in general, if you look at the search application, it is increasing tremendously every year in the China market, and so I believe the search market in general has been growing pretty well. But having said that, I also believe that the search revenue in general, and compared to brand advertising, is still a small portion of the total revenue. It is not like the U.S. market, where brand advertising is a smaller portion of total advertising and search is a big portion.

I think search is more suitable for transaction-based advertising, and brand is, of course, advertising is more suitable for big companies, brand promotion. Currently, based on our understanding of the market, we believe there is a stronger need for brand advertising in China in the next few years and a transaction-based advertising.

Search will continue to grow very well. In terms of percentage, it may outpace the brand advertising because it is off of a much smaller base, in the next few years. But on the other hand, brand advertising probably will grow faster in terms of absolute dollar market share. That will be my assessment.

Jason Brueschke - Citigroup

Great. My last question, Charles, would be this. You seem a lot more confident on this call than the last two. On the last two, you had mentioned the possibility of doing some restructuring to your various businesses. It seems like you have the ship completely turned around. Wireless is declining, but more moderate. It is falling as a percentage of total revenue. Should we expect any major restructuring from you, or are you going to continue on the path that you are on and we just model it out? You are going to be a globally dominant brand advertising company with a much smaller exposure to wireless?

Charles Chao

I think that is probably a fair statement here. We probably will not do any major, major restructuring in the near future. Given that, we begin to realize more and more the value of SINA property as a brand advertising platform in China, especially the ability for us to increase our inventories in the content area and ability to further extend our brand power. These two factors have played very well in China’s advertising market in the branding sector. We clearly see the advantage we have and we believe that we should be doing pretty well in this area, have pretty nice growth in this area in the next few years.

I think that is the strength of SINA, so we should probably develop our strategy surrounding the core components of this company. That is the main direction we are heading to.

The mobile business, you are right. We do not have too much expectation, but it still contributes as a cash flow business. Until the point we will see acceleration again when the mobile Internet era comes.

We still believe this is going to be a good opportunity for us and we will keep working on that.

We will take one more question here.


Your final question comes from the line of Leah Hao with Thomas Weisel Partners. Please proceed.

Leah Hao - Thomas Weisel Partners

My question would be regarding your longer term operating margin trend, or in other words, the expense trend that we should be expecting over the next few quarters.

Charles Chao

I think currently that our advertising margin and wireless margin are pretty similar. I think the advertising margin is slightly higher than the wireless margin, so I think that will continue to improve for advertising over the next few years as we grow revenues.

On the other hand, mobile operating margin will have to come down, so it will depend on how fast mobile operating margin comes down. That will determine what kind of margin we are going to maintain, but I think in general, probably on a non-GAAP basis, we are looking at slightly over 20% going forward, assuming mobile continues coming down.

Leah Hao - Thomas Weisel Partners

Thank you. Just a very quick follow-up in terms the tax rate over the next few quarters that we should be expecting. Thank you.

Charles Chao

The current tax rate is in the range of 5% to 10% in the current year. We probably expect a similar rate, maybe more towards the high-end next year. We will probably go further up to reaching 10% to 15% in the year 2008.


I would now like to turn the call back over to management for closing remarks.

Chen Fu

Thank you, everyone, for joining our call today. Please feel free to contact us for any follow-up questions. Thank you.


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

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