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SINA Corporation (SINA)

Q1 2007 Earnings Call

May 14, 2007 9:00 pm ET

Executives

Cathy Peng - Investor Relations

Charles Chao - President, Chief Executive Officer

Herman Yu - Acting Chief Financial Officer, Vice President

Analysts

Paul Keung - CIBC World Markets

James Mitchell - Goldman Sachs

Jenny Wu - Morgan Stanley

Wallace Cheung - Credit Suisse First Boston

Lin Shi - Lehman Brothers

Catherine Lun - Citigroup

George Chu - UBS

Dick Wei - JP Morgan

Adam Clark - Bear Stearns

Gene Munster - Piper Jaffray

Eddie Leung - Deutsche Bank

C. Ming Zhao - Susquehanna Financial Group

Presentation

Operator

Good day, ladies and gentlemen and welcome to the SINA first quarter 2007 earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Ms. Cathy Peng, Investor Relations Manager. Please go ahead, Madam.

Cathy Peng

Thank you. Good morning. Welcome to SINA's earnings release for the first quarter 2007. Joining me today are our President and CEO, Charles Chao; and our Acting CFO, 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 fact, including statements about our beliefs and expectations. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking 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, 2006, and 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 at our corporate website at http://corp.sina.com.

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

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

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Charles Chao

Thank you. Good morning, everyone and welcome to our first quarter 2007 earnings conference call. I am pleased to report another strong quarter with advertising revenues reaching the high end of our original guidance, despite a worse-than-expected seasonality due to the timing of Chinese New Year. Our performance in the mobile business was also better than we initially expected.

In the meanwhile, we continue to make good progress in building the largest multimedia content platform with strong user participation and sticky interactive communities during the quarter, as we see the traffic for user-generated content continues its fast growth as planned.

During the first quarter, we added another new product to our content platform, SINA Music Box. This new music platform we’ve established through partnerships with all major global music record companies, including Universal, Sony, KPMG, EMI and Warner Music, as well as the largest Chinese language and music record company, [inaudible].

SINA Music Box will be providing over 300,000 songs and over 20,000 music videos from those companies. It is the first legal music platform in China and we initially run on an advertising sharing basis with the music content providers.

We are excited about this new opportunity in providing additional multimedia content to our users, as well as the potential of creating a large scale music community in preparation for a future fee-based download model.

During the first quarter, our blog service continued to grow at a fast pace and off a high base. In the last week of April, daily unique visitors of our blog service reached 4.6 million compared to 3.7 million for the last week of January, and the page views for blog service also increased by 21% in the same period. We have further integrated our blog service into our different content channels during this quarter and with other community products, such as BBS. At the end of April, we saw the accumulated number of blogs posted on the SINA website reached 100 million, an important milestone.

At the end of last year, we launched our video sharing platform, SINA Podcasting. The results for the first quarter were encouraging. In the last week of April, the daily unique visitors for our video-sharing program reached 1.2 million, doubling the number three months ago. The number of video items viewed by the users on a daily basis also increased by 60% during the same period to 7.5 million.

By any measurement, it is already one of the largest video sharing platforms in China. We see great potential for this new product and believe it will be an important traffic driver for us in the year 2007 and an important revenue driver beyond.

As I discussed at the beginning of the year, we intend to invest heavily on this video platform with adequate equipment and bandwidth, which could be costly and which could negatively impact our gross margin in the near term, given advertising will lag behind in terms of picking up the volume.

We saw some margin depression in the first quarter for advertising as we quickly ramped up the capacity for the initial video-sharing program, but we believe such a negative impact on gross margin will be much less obvious in the future quarters.

We believe this investment will prove to be worthwhile over the longer term as we have a much better chance to build a large, online video platform in China, given our user base and brand power.

On the advertising side, we had a very good start in the first quarter with the brand advertising growing 43% year over year. Branded advertising in China grew by 45% year over year, and marked the fourth consecutive quarter we were able to grow our China branded advertising revenue by 45% or more. This speaks for the strength of our platform and solid execution on the sales side.

During the first quarter, we experienced worse-than-expected seasonality for the Chinese New Year, as we saw a very slow period for customer orders in the month of February. However, the orders came back very strongly in the month of March and we eventually were able to reach the high end of our original plan. We are happy to see the advertising momentum continue as we enter into the second quarter.

In terms of revenue contribution for the brand advertising, automobiles, FMCG and the financial services were the major drivers for the growth in the first quarter, with the revenues from all three sectors almost doubled from the same period last year. The IT industry also performed well, with a 41% jump year over year.

Relatively speaking, the real estate market has shown slower growth in the first quarter but it nevertheless accounted for 11% of our total brand advertising revenue for the quarter.

We had a great start for the brand advertising business for the year and we are positive on the overall online advertising growth for the remaining quarters for the year. However, I would like to caution you that the year-over-year growth may not be as robust as we saw in the first quarter, mainly due to the outstanding performance we had for the World Cup in the second and third quarter of 2006. The World Cup brought in approximately $8 million ad revenues for SINA for those two quarters in 2006 and created a much higher base for comparison for the next two quarters. Excluding the World Cup effect, we actually see a pretty consistent pattern for ad revenue growth.

Now let me talk about the mobile business. Needless to say, it is still a challenging business for us. Although we were able to outperform our original plan for the first quarter in both revenues and margins, we are still not seeing signs of improvement of the operating environment for this business and expect it will continue to decline in the second quarter.

In the meanwhile, we continue to grow traffic of our free WAP portal with accelerated pace, with page views for WAP portal increasing by 55% for the quarter. We have done more experiment of advertising service on the WAP portal and became more convinced that this will be a ribald business for the future. As there will be no changes to the free WAP operating policies by mobile operators, we expect to see significant growth in our free WAP portal traffic this year as more and more people begin to adopt a free WAP service. SINA has a natural advantage over most other free WAP service providers due to our Internet portal experience and our rich content offerings. We view mobile advertising as a business with great potential and we continue to pursue in that direction.

That’s it for me and I will now turn to Herman for some financial highlights.

Herman Yu

Thank you, Charles and thank you all for joining our conference call today. I will now take you through the key financial highlights. We are as pleased with our financial performance as we are with our strong operational achievements for the first quarter of 2007. Total revenues for the first quarter came in at $51.3 million, which is above our target between $48 million and $50 million, and represents a 10% growth from the same period last year.

Our advertising revenues, which exclude search, for the first quarter of 2007 were $31.8 million, representing a 43% growth year over year. Advertising revenues in China grew 45% year over year. As Charles mentioned earlier, this is the fourth consecutive quarter that advertising revenues in China have gone up at 45% or above year over year. We delivered a strong Q1 despite the worse-than-expected impact of the Chinese New Year in February.

The progress that we have made in integrating multimedia and user-generated content into our verticals and building up our interactive community, as Charles pointed out earlier, will not only further strengthen SINA's brand in the Chinese marketplace but further lend support to a healthy online advertising business in the future.

For the first quarter of 2007, online advertising revenues represented 62% of SINA's total revenues compared to 47% for the same period. We expect this trend to continue in the near future.

Turning to our non-advertising business, for the first quarter of 2007 our mobile business generated revenues of $18.2 million, which represented a decline of 20% year over year and 5% quarter over quarter.

SMS revenues declined 1% quarter over quarter to $10.6 million, or 58% of our mobile revenues.

IVR revenues declined 32% quarter over quarter to $3.5 million, or 19% of our mobile revenues. During the first quarter, operator costs for IVR increased from 15% to 30% of revenues as a result of us switching from a proprietary IVR platform to that of China Mobile’s. We began promoting less IVR as a result of the decrease in margins.

Revenues from 2.5G, which include MMS, WAP and Kjava, grew 32% quarter over quarter to $3.2 million from greater promotion.

For the first quarter of 2007, our other non-advertising revenues, mainly search and other fee-based revenues, were $1.3 million, representing a decline of 31% year over year and a decline of 7% quarter over quarter. The continuing decline represents a phasing out of our prior search business. We hope to reverse the search revenue decline in the second-half of 2007.

Before I turn the discussion to gross margins, I would like to remind everyone that our discussion today includes non-GAAP measures which exclude stock-based compensation as well as other items. We use non-GAAP measures to exclude certain items that are not expected to result in future cash payments that are non-recurring or that may not be indicative of our core operating results.

For further explanation of our non-GAAP measures and detailed reconciliations between our GAAP and non-GAAP results, please refer to our earnings release.

Our non-GAAP gross margin for the first quarter of 2007 was 60% compared to 62% in the same period last year, and 64% last quarter. Our non-GAAP advertising gross margin for the first quarter was 59% compared to 64% in Q106 and 66% last quarter.

We incurred significant bandwidth and related costs this quarter to support our newly launched SINA Podcasting and other video related products. As revenues are expected to increase in Q2 and onward, our advertising margin should improve.

Other factors contributing to the year-over-year decline in non-GAAP advertising gross margin included increased content and web production costs. On a sequential basis, a lower revenue base in the first quarter of 2007 also contributed to the decline in advertising gross margin.

Non-GAAP gross margin for our wireless business was 60% in the quarter compared to 59% last year and 61% last quarter.

Turning to operating expenses, our non-GAAP operating expenses for the first quarter 2007 were $20.8 million compared to $20.4 million in the same period last year and $22.4 million last quarter. The 2% year-over-year increase in operating expenses was mainly due to the appreciation of the Renminbi and higher bad debt expenses, partially offset by a decrease in payroll related costs and marketing expenses.

On a sequential basis, non-GAAP operating expenses declined mainly from the lower commissions and other payroll related costs, and lower T&E expenses, offset by higher bad debt expenses.

Our non-GAAP operating margin for the quarter was 20% compared to 18% in the same period last year.

Before I get into net income, let me elaborate a little on income taxes. During the quarter, a new corporate income tax law was enacted in China which attempts to unify the income tax rates between domestic and foreign investment enterprises. Starting January 1, 2008, approximately $0.4 million of our income tax expense this quarter relates to a one-time write-down of our deferred tax access as a result of the new corporate tax laws.

Turning to net income, non-GAAP net income for the quarter, which excludes stock-based compensation and other items was $11.4 million, an increase of 19% from the same period last year. Non-GAAP net margin for the first quarter was 22% compared to 21% in Q106. Non-GAAP diluted EPS for the quarter was $0.19 compared to $0.16 in the same period last year.

Turning to balance sheet and cash flow, as of March 31, 2007, our cash, cash equivalents, and marketable securities were $382.7 million, compared to $304.4 million at the end of Q106 and $362.8 million at the end of last quarter.

Cash flow from operations for the quarter was $16.6 million, compared to $12.5 million in the same period last year and $14.9 million last quarter. Capital expenditure for the quarter was approximately $4.9 million, most of which was used to support the video sharing initiative.

Let me now turn to our guidance for the second quarter of 2006; we are targeting total revenues of $58 million to $60 million. For online advertising, we are targeting $40 million to $41 million. For our non-advertising business, we are targeting $18 million to $19 million. Excluding any new share grants, stock-based compensation should be at around $2 million for Q2.

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

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Paul Keung with CIBC.

Paul Keung - CIBC World Markets

I just want to get a little deeper into the branded growth. How much of the 4% year-over-year growth in your advertising relates to existing channels versus new channels? To take it one step further even, how much of that growth is related to existing customers versus new customers this quarter?

Charles Chao

I’m sorry. I did not quite get it, Paul.

Paul Keung - CIBC World Markets

Your advertising growth this quarter, how much of the growth is new versus existing channels, and how much of the growth is existing versus new customers?

Charles Chao

Channels -- what do you mean by channels?

Paul Keung - CIBC World Markets

New inventory versus existing inventory, or pricing. In the past, you’ve been able to give some breakdown in terms of what’s driving some of that growth.

Charles Chao

I think we did not really increase any pricing for this quarter compared to the previous Q1 versus Q4 last year, there was no increase of price. If you compare year to year in terms of the pricing, we did raise the price in Q2 and Q4 last year and that probably will contribute to about half of the growth on a year-to-year basis, around 20% is of contribution from the pricing.

In terms of the customers, I think we saw probably a 20% increase in our customers year over year. I think it is probably mainly due to the spending increase per customer versus the number of customer increase on a year-to-year comparison basis. As I mentioned briefly in the script that for Q1, the major driver for the increase of the advertising mainly came from automobiles and FMCG and financial services, basically.

Paul Keung - CIBC World Markets

If I took that $8 million adjustment for World Cup, then that would suggest you still have a pretty strong acceleration on the growth in the second and third quarter. Does that make sense?

Charles Chao

I think so. We cannot really exclude it entirely because there will be some kind of event this year also but nothing compared to the World Cup. World Cup is particularly big and exceptional in terms of the volume of advertising it brought in, so it created a very hard base for comparison. But you are right; if we take this effect out then our year-to-year growth is still very strong in Q2 and Q3.

Paul Keung - CIBC World Markets

Okay, and last one’s a real quick housekeeping; on the CapEx, there’s $5 million this quarter, mostly for video sharing initiatives. How much more is left to be spent there and what kind of CapEx outlook do you have for 2007?

Charles Chao

We are probably targeting about around $15 million to $17 million total CapEx spending for this year.

Paul Keung - CIBC World Markets

And how much of that is video sharing then?

Charles Chao

I think that’s about 20% to 30% related to video sharing.

Paul Keung - CIBC World Markets

Thank you.

Operator

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

James Mitchell - Goldman Sachs

Thank you for taking my questions, a couple just on the margins; if I look at the branded advertising gross margin, would I be right in thinking the main cost of revenue you take against branded advertising would be content costs, bandwidth, server, sales commission, business tax? Could you give some sense of which are the big ones within that mix?

Charles Chao

I think in terms of sequence, you will say that the largest actually is the production costs related to our entire content department, which includes all the editors in that category. The second-largest probably is the content and now it is probably content and bandwidth, about equal in terms of the size. And then server depreciation and business tax. Sales commission is not included in there, so most of these costs are fixed costs, with the exception of business tax.

James Mitchell - Goldman Sachs

Okay, great and then second on the margins, you had a very low sales and marketing spend during the quarter, which I guess is partly seasonal. Would you see sales and marketing costs rebounding sharply in the second quarter the way that they have historically?

Charles Chao

No, I think in Q1 we did not spend that much on the general corporate marketing on the branding side, and also there is a little bit of a decrease in the marketing advertising expenses for the wireless business. In Q2, we will probably increase a little bit for the general corporate purpose. It is not going to change that much in terms of marketing. It will probably increase slightly and the sales expenses will also increase a little bit due to the increase of advertising revenues.

James Mitchell - Goldman Sachs

Last one for me, just on the taxes; you mentioned you wrote off a deferred tax asset because of the new tax law. How does that impact what you would expect your tax rate to be in 2008 and going forward? The new tax law, not the write-off?

Charles Chao

I think the tax law only impact -- I mean, the deferred tax asset we recorded at the end of last year because of the deferred tax asset really is calculated based on your future tax benefit times the future tax rate. If that tax rate is decreasing, then the deferred tax asset is reduced. It’s a one-time hit.

In terms of the future, the effective tax rate, I think this quarter is a little bit higher than the average we are going to see for the entire year, just because of this one-time write-off. If you take this out, it will be pretty much what we will see for the entire year’s effective tax rate. The new tax rate will not impact our effective rate for the next couple of years because we still have some entities in tax holidays with reduced tax rate and that still will be substantially lower than the future, the 25% unified tax rate on a normal basis, which was mentioned.

James Mitchell - Goldman Sachs

So previously, you were accruing the deferred tax asset at a statutory corporate rate and that’s now been reduced to 25% from 30%?

Charles Chao

Exactly.

James Mitchell - Goldman Sachs

Okay, got it. Thank you very much.

Operator

Your next question comes from the line of Jenny Wu with Morgan Stanley.

Jenny Wu - Morgan Stanley

Thank you for taking my questions. Two questions; first one is regarding mobile value-added services. When would you expect that this actually will stabilize? For second quarter, we saw you guided 3% to 8% quarter over quarter decline, and for non-MVAS sector. For this target, how much is due to the decline for the value-added services?

Charles Chao

In terms of the mobile value-added service, we mentioned it is still pretty challenging in terms of the environment. We do not see any ease up of the operating environment here in China, so it is still very tough in terms of introducing a new product and the video from that product distributed to the users.

Having said that, we do see a little bit stabilization in terms of the business. As we see in that sequential decline actually was less severe in the last couple of quarters, but based on what we see right now, we are not really seeing a growth in the near future for this business.

I’m sorry, what was your second question?

Jenny Wu - Morgan Stanley

For your second quarter guidance, you guided a 3% to 8% sequential decline for the non-advertising sector. How much is due to decline for the value-added services?

Charles Chao

I think it was mainly due to the decline in value-added service. There was some decline in the search business but it was not going to be significant, so I would say mainly related to the mobile value-added service decline.

Jenny Wu - Morgan Stanley

Thank you. Second question is regarding your online advertising pricing strategy, given the Olympic related advertising in the second half of this year, what would be your advertising pricing strategy? Thank you.

Charles Chao

I think it is -- normally, we expect that the advertising activity related to the Olympic Games will pick up more in the second half of the year versus the first half, and we are actually seeing a little bit more orders coming in in this quarter compared to the first quarter for Olympic-related activities. We will probably see more in the second-half.

I think this Olympic-related activities, in terms of -- it is not going to have too much direct impact on the pricing structure we are going to have for advertising in the second-half, but it is a supply/demand issue. If we see more demand then obviously we have more ability to charge a premium for some of the activities, given that some of the resources will be limited in terms of some of the advertising campaigns Olympic-related advertisers want to do. So there might be a premium we can charge but at this point, it is too early to say.

Jenny Wu - Morgan Stanley

Thank you.

Operator

As a reminder, ladies and gentlemen, we ask that you limit your questions to one. Your next question comes from the line of Wallace Cheung with Credit Suisse.

Wallace Cheung - Credit Suisse First Boston

Good quarter. I think maybe two questions; first of all, given that first quarter results and also second quarter guidance, basically the revenue for brand advertising is already beyond your annual guidance. Do you have any plans to revise upward your brand advertising annual guidance?

Charles Chao

Well, you’re right, Wallace. We are looking at, if you look at the average, it is already close to 40% for the first-half of the year. And our original guidance was between 30% to 35%, and it looks like this range was a little bit conservative and we are probably looking at more high-end of our original guidance right now. But it is still a little bit early for us to really change that year guidance too much at this point. We will see. We will have a much better idea when we finish the second quarter and we will enter into the third quarter, basically.

Wallace Cheung - Credit Suisse First Boston

Thank you. Another question, actually based on -- just looking for a comment on the customer mix change. I know you are getting more and more customers and you are also mentioned FMCG is actually growing much stronger, but do you see any major change or shift of the customer mix in the next few quarters, or even the year ahead? Because before, traditionally [inaudible] a major one of your advertising growth.

Charles Chao

You mean the customer mix, you are saying, right?

Wallace Cheung - Credit Suisse First Boston

Yes.

Charles Chao

Well, we are adding more new customers. Right now, I think the new customers are more coming from the new high-growth industries like FMCG and financial services, especially in the area of financial service. We see a lot of new customers are trying the web advertising right now. A lot of investment fund and banks and insurance companies are spending, starting to explore the web advertising, having started from Q1.

So there are some markets doing particularly well in China and there are a lot of activities in the financial sectors. We probably will see more customers coming from this particular sector and of course, FMCG as I mentioned is another sector we are going to see a lot of new customers.

Wallace Cheung - Credit Suisse First Boston

Maybe just a final question -- any guidance on the percentage of revenue coming in from the online video side?

Charles Chao

I’m sorry, I could not really hear very well.

Wallace Cheung - Credit Suisse First Boston

Sorry. What is the percentage of revenue coming from online video, rich media advertising?

Charles Chao

I see. I think the rich media advertising in terms of percentage is very similar to what we saw in the last quarter of ’06. We are doing a lot of experiments in terms of different format right now. We probably will see more video advertising in the second half of this year.

Wallace Cheung - Credit Suisse First Boston

Great. Thank you.

Operator

Your next question comes from the line of Lin Shi with Lehman Brothers.

Lin Shi - Lehman Brothers

Good morning. Thank you for taking my questions. I want to ask something about the mobile advertising. You mentioned you are seeing some good trends there. Would you please give more color regarding the client base and the magnitude in terms of revenue?

Charles Chao

I think as I mentioned, at this stage we are mainly doing our product trials and experiments for mobile advertising in terms of different formats and our free WAP portal right now. Mainly, we do experiments with our existing customers so in their total advertising package, we will increase their mobile element for them to try, especially for some activity-related advertising campaigns. We will let them try the mobile advertising.

When I say the results have been encouraging, what I meant was that the effect of the advertising was very encouraging and customers like them, so I think we still need some time to really experiment different finished models here, and especially we want to see more growth in the traffic for our free portal service, and then we will probably start to sell mobile advertising large scale.

At this point, we are not really selling that much but we are including these mobile elements in our total marketing campaign package with our existing customers to let them try out. I think some of this advertising turned out to be very, very effective so customers like them. We are encouraged with these results and we will probably invest more in this particular direction.

Lin Shi - Lehman Brothers

Okay, that’s interesting. A quick follow-up; you mentioned there has been some decline in payroll related expenses. Which part did we see the payroll decline?

Charles Chao

I think it was mainly the bonus-related payroll expenses. There was no decrease in our headcount. There was some increase a little bit in our headcount, but in terms of the bonus expenses, there is a decline in terms of sequential comparison between Q1 and Q4. It is not that significant.

Lin Shi - Lehman Brothers

Okay. Thank you very much.

Operator

Your next question comes from the line of Catherine [Lun] with Citigroup.

Catherine Lun - Citigroup

Good morning. Thank you for taking my questions. I was wondering if you could please update us on your strategies in Web 2.0, including the monetization strategy and the timeline. For example, you mentioned in your last conference call that you would start monetizing your blog service more directly this quarter, so if you could please update us on that.

Charles Chao

The question relates to the Web 2.0 monetization, right?

Catherine Lun - Citigroup

Yes, Web 2.0 monetization.

Charles Chao

I think we started to do more advertising our blogs, our platform especially on the front page and we actually have a front page for the entire blog service. We also have the front page for our blog service in different content channels. For example, we have an entertainment blog, we have a sports blog, we have a finance blog, et cetera, et cetera. For each content channel, we also have a front-page for this blog service. We start to do more advertising on the front page of these blog services.

Because the traffic has been pretty big in these blog channels, so we are able to sell more advertising in these blog channel front pages. That’s in addition to what we mentioned before, that we have incorporated a lot of blog elements in the total marketing campaign package for our big customers. We actually started more of these integration, of integrating user participation into the marketing campaign for a lot of customers and this has become a very, very good selling point for a lot of marketing packages, especially for big customers. They like the user participation element in the campaign.

In fact, a lot of Olympic related activities and other campaigns waiting through the user participation will improve our blog service and that’s one of our important selling points.

In terms of the monetization in the personal blog page, we have already developed a primary system and we will probably experiment to sell some of these formats starting in Q3 basically.

Catherine Lun - Citigroup

Thank you very much.

Operator

Your next question comes from the line of George Chu with UBS.

George Chu - UBS

Good morning. Just a question on the Olympic-related spending; I would like to know if your customers are giving you more visibility on their budget for ’07 and possibly into ’08. Do you think we should see the bulk of the Olympic-related spending starting to ramp up in the second-half of ’07, or do you think that is going to come through in ’08 mostly? Thank you.

Charles Chao

I think we have indications from big customers for the entire online budget, especially big customers for ’07 but not so much for ’08. Olympic spending obviously is a part of their overall budgets for some of these big customers. But in terms of a specific allocation for the Olympic campaign, we do not at this point have enough visibility for a lot of Olympic sponsors and Olympic partners at this point. We are still I think at this stage, a lot of these sponsors and partners are still at a stage of fixing their plans and budgets for the campaign.

Having said that, as I mentioned earlier, we do see more Olympic-related campaigns this quarter versus first quarter, and the indication probably we’ll see more in the second-half of the year. But in terms of quantifying the impact, it is still too early. For ’08, I don’t think we have enough visibility in terms of how much these people will spend because there was simply not that much discussion in our ’08 campaign yet. But it’s fully expected that will pick up gradually one year before the Olympic Games, and so we will ramp up in the second-half and it will further ramp up in the first-half of ’08.

George Chu - UBS

Thank you. Just a quick follow-up; on your video sharing services, do you think you have the best mechanism to monetize this service, or do you think an agreement similar to a YouTube/Google type of agreement will be more ideal to drive more revenue from it?

Charles Chao

I believe we have probably the best way of monetizing in this market because when we talk of video, the video-sharing program platform is only part of our video offerings. We have another channel called SINA Video, which provides the content with copyrights, like the TV programs and the content from sports and entertainment events and so on and so forth. There are a lot of these so-called -- many users generate content and content from traditional media companies, from TV production house, from the sports event companies. These actually also tend to attract a lot of traffic also. So it is important to have these content, I mean copyright that is actually easier to sell advertising on these content.

But the fact that we have a very powerful video sharing platform here, first it will build a very powerful base for our users for the video programs, and also more importantly, we can integrate a lot of user-generated content with the content we acquire from different TV companies and content companies. So effectively, that will create a much more powerful content platform as we have seen in our blog service.

The reason our blog service became some effective and successful, not only because we have generated a lot of content from our users but also we were able to integrate a lot of this user-generated content into our content channel into our different other community products, so it will become very sticky and very powerful and become essentially a very interesting content platform with both professional content as well as user-generated content.

So this is the same idea for the video. If we can integrate this video content well, then we will be able to build a much bigger video platform and we will be in a much better position to sell this video content going forward in terms of monetization.

George Chu - UBS

Thank you.

Operator

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

Dick Wei - JP Morgan

I just want to ask about the search strategy. Any change in the strategy? Also, if you can give us some update on some of the development efforts on the search, that would be great. Thanks.

Charles Chao

In terms of search, there was not too much change from what we discussed last quarter, and we are still working on a very, very -- we are very much focused on a lot of areas and also we are working with partners to try to provide a better experience for our overall website users. So we probably will have more of an update in the near future for the search business in general, for SINA basically. At this point, there is not too much I can say about our search updates, especially compared to last quarter.

Dick Wei - JP Morgan

Can I have a quick follow-up on the bad debt expenses that was mentioned on the operating expenses side?

Charles Chao

I think the bad debt expenses is pretty normal in the course of business and I think this quarter it is a bit higher than previous quarters, and also versus the bad debt expenses we saw a year ago. But I think that is pretty normal in terms of percentage of total revenue. If you look at it on a year-to-year basis, it really did not change too much. It really depends on the timing and when the bad debt occurs. You will probably see certain volatility and deviations from quarter to quarter. But on an overall basis, on a year-to-year basis, if you look at overall, it really did not have too much impact.

Dick Wei - JP Morgan

That was all related to the branded advertising side?

Charles Chao

For this quarter, yes.

Dick Wei - JP Morgan

Okay, thanks a lot.

Operator

Your next question comes from the line of Adam Clark with Bear Stearns.

Adam Clark - Bear Stearns

Thanks for the call. I just wanted to ask very quickly more of a strategic question. I noticed your cash balance is up to almost $383 million, including the marketable securities. I was just wondering what kind of opportunities you are seeing in terms of potential growth through acquisitions in China and if you are not seeing anything, do you expect to start returning cash to shareholders through buy-backs?

Charles Chao

In terms of how to use cash, we have commented a few times in the past that we want to reserve some cash for future acquisitions and when the opportunity comes. At this point, we still believe there will be opportunities in the future but we are interested in some investor site as well as some of the new technology companies where we really have a lot of synergies and provide good technology product for our company going forward.

But in general, we believe the private market is still expensive compared to the public market, so we will be very careful in terms of selecting our candidates. But to answer your question, we do want to reserve some cash for future acquisitions but in terms of buy-backs, we are open for that but we would look at the movement of the market to make decisions. But at this point, we don’t have a plan to do that.

Adam Clark - Bear Stearns

Thank you.

Operator

Your next question comes from the line of Gene Munster with Piper Jaffray.

Gene Munster - Piper Jaffray

Good morning. Congratulations. If you look out over the margins here, you have a few quarters that have had some abnormally high spending in infrastructure. As we look towards the Olympics, do we see any sort of issues that could pop up as far as investments going forward?

Charles Chao

I think in terms of margin, especially wireless margin is probably difficult to predict at this point, but in terms of the advertising margin, what you saw in Q1 was pretty temporary and you saw a sequential revenue decline, about 11% and also that we had a one-time cost for the video-sharing program, because video was launched at the end of December, so most of the new bandwidth and the server acquisition was in Q1, and so this was particularly high. I would say most of these costs for the advertising, as I mentioned, were fixed so it is not going to change that much sequentially, even revenue declines. So that revenue decline actually 3% to 4% decline in margin and the new launch of the video platform probably comes to 2% or 3% of the decline. I view this as pretty normal and it was very expected.

Going forward, when the revenue begins to grow again and we see the margin improvement and also the incremental costs of the video sharing program will not be that great. We are looking. We are also working on a lot of partnerships to try to reduce the cost of bandwidth for the video platform, so starting from Q2, the increase of the bandwidth would not be significant with the traffic increase for video.

We fully expect that the gross margin for advertising in the remaining year will probably come back to a more normal, mid-60 level. But in terms of the potential in additional costs for the Olympic Games, I think it will probably more relate to the additional content acquisition during the Olympic Games and it probably will be in Q3 of next year. So that particular element, there might be some impact but it’s not going to be significant from now until the Olympic Games.

I hope that answers your question.

Gene Munster - Piper Jaffray

Yes, it definitely answers it, thank you. But on that note as far as more content for the Olympic Games, you seem to be more aggressive versus some of your competitors in terms of getting some of the other content or any sort of update on that front.

Charles Chao

Well, it depends on the assessment of the return on the investment. When we have the content acquisition, we have always been more rational and cautious. We will definitely invest in a content we believe will help us to drive traffic and building up the best Olympic coverage, but it will be on a case-to-case basis and we will need more assessment on original investment basis, but if there is one particular content or two that will really help us not only help us building the best content coverage for the Olympic Games but also will help us in terms of branding and marketing, then that will be another issue.

But just for the content per se, we’ll be cautious and rational on that.

Gene Munster - Piper Jaffray

One just very quick question -- is the $8 million in the World Cup, was that just in the June quarter or was that spread between two quarters?

Charles Chao

In two quarters.

Gene Munster - Piper Jaffray

Thank you.

Operator

Your next question comes from the line of Eddie Leung with Deutsche Bank.

Eddie Leung - Deutsche Bank

Good morning. Can you talk about your vision and development roadmap for your wireless Internet portal? How big a role do you think operators will play in the future? What are the value propositions for SINA?

Charles Chao

I think that’s a very good question. I think in terms of wireless, I think we talked about our vision before, that I think everyone knows there are a huge number of wireless users, mobile phone users in China. The number base is much higher than Internet users right now. Our vision is try to create a large scale multimedia platform for content and for other communities and that does not only include the PC side but also includes the mobile side, because we believe that in the future to access the Internet and a lot of activities will be through the mobile phone. So whatever we do today in terms of content, communities and product we will have a mobile application there so people can access our content and access applications and communities through the mobile phone. So it’s an integral part of our entire content strategy for this company.

In terms of the free WAP service, we believe this is a portal on the mobile phone and it is pretty well-received by users and SINA has experience in terms of operating the best portal in China and we are expanding this experience on the mobile phone also, so we have seen a very rapid growth in the mobile portal traffic in the last year or so. So we continue to see this growth in the remaining year as we add in more functions and content to our mobile platform.

Having said that, there is a risk here. I don’t want to underestimate that risk. It is the mobile operators’ intention in terms of getting into the content business themselves, so there will be -- they have different -- in terms of what mobile operators will do in terms of intervening in this particular business and in terms of more participation from operators themselves in this particular business.

At this point, it is still not clear what exactly they will do. I think they just introduced a new policy in China and every time people access free WAP service, there will be a reminder for the fee structure coming for the free WAP service. This is one new development here but we do not know if there will be other future developments in this particular area. If mobile operators decide to really have more intervention in this area, try to participate more, there may be a negative impact on our own strategy to develop our mobile portal going forward.

We are still optimistic as we believe that free WAP service provided by different content providers and operators and third party providers will be in the best interest of the consumers and the users in China, and that will be a trend here. Just like the Internet service we have seen in the last 10 years.

But I agree with you; there will be a degree of uncertainty and we are watching that very, very closely.

Eddie Leung - Deutsche Bank

Thank you.

Charles Chao

Thank you. I think we’ll have one more question we can take.

Operator

Your last question comes from the line of Ming Zhao with SIG.

C. Ming Zhao - Susquehanna Financial Group

Thank you for taking my question. Mainly a question on your music product you just launched, in several parts; can you update us what kind of user trends you are seeing with this product right now? Also, in the deal structure, do you have to pay any up-front or fixed payment to these music labels? Are you going to partner with more [WOCO] disc labels in the future? Finally, how exactly are you going to monetize that product?

Charles Chao

That’s another long question, Ming. In terms of the traffic, we launched this product in February and it is still early. Because there is a lot of work we have to do with the music labels in terms of putting their songs on the website, and this actually was taking longer than we expected. So right now, we were originally talking about over 300,000 songs. Right now, it is only less than half of that number is on the website, so we have not really started to fully promote this platform. Once all of these songs are in place, we’ll be promoting those songs and the platforms with full capacity.

But still, the results have been pretty encouraging and people like it and there is still going to be some [inaudible] on the product side. We will probably have a better idea towards the end of this Q.

In terms of the relationship and arrangement with the music label house, it is on a revenue share basis for advertising and there is a fixed fee. It is an insignificant amount and we would have paid those fixed fees for our mobile value-added service anyway, so now it’s more like lumped together, it’s one fee but it’s not a really significant difference from what we were paying before just for the mobile service.

So currently this model is mainly on the advertising revenue share, so we generate advertising revenues on the platform we share with different labels, music label houses. We believe that this model will be the best model at this stage. You probably are aware that there are a lot of piracy issues for music in China and it is very difficult to charge for the download for music, just because the pirated music is widely available in the market. So building a very large-scale platform here and we can attract a large number of users and we can do advertising models initially. Once we have the ability to build this platform and also accordingly, building a large music community, in the future when the legal environment gets better we probably will be able to consider other business models like the download model and so on and so forth. So at this stage it is still mainly on an advertising model.

This platform is an open platform. We are open for local music label houses also. Right now there are already a lot of people who expressed interest. I don’t have the exact figure but I know that probably already a few local partners already joined the platform at this point.

I hope that answers your question.

C. Ming Zhao - Susquehanna Financial Group

Thank you.

Charles Chao

Thank you. I think that’s it for today. Thanks for joining us. We will see you next quarter. Bye-bye.

Operator

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

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Source: SINA Q1 2007 Earnings Call Transcript
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