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SINA Corp. (NASDAQ:SINA)

Q4 2007 Earnings Call

February 20, 2008 8:00 pm ET

Executives

Cathy Peng - Investor Relations Manager

Charles Chao - President and Chief Executive Officer

Herman Yu - Acting Chief Financial Officer

Analysts

Gene Munster - Piper Jaffray

Jenny Wu - Morgan Stanley

Wallace Cheung - Credit Suisse

Leah Hao - Goldman Sachs

Eddie Leung - Merrill Lynch

Jason Brueschke - Citi Investment Research

George Chu - UBS

Wendy Huang - Bear Stearns

C. Ming Zhao – SIG

Operator

Good day, ladies and gentlemen. Welcome to SINA Corporation's fourth quarter and fiscal 2007 earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's conference, Ms. Cathy Peng, Investor Relations Manager. Please go ahead, ma'am.

Cathy Peng

Thank you, good morning. Welcome to SINA's earnings release for the fourth quarter and full year 2007. Joining me today are our President and CEO, Charles Chao, and our Chief Financial Officer, Herman Yu. This conference call is also being broadcast on the Internet and is available through the investor relations section of the SINA website.

Before the management presentation, I would like to read you the Safe Harbor statement in connection with today's conference call. During the course of this conference call, we may make forward-looking statements, statements that are not historical fact, including statements about our beliefs and expectations. Forward-looking statements involve general 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 are 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, I would like to remind you that our discussion today includes non-GAAP measures, which include 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 may not be indicative of our core operating results. For further explanation of our non-GAAP measures and a detailed reconciliation between our GAAP and non-GAAP results, please refer to our earnings release.

Following management's prepared remarks, we will open the line for a brief Q&A session. With this, I would like to turn the call over to our President and CEO, Charles Chao.

Charles Chao

Thank you, Cathy and good morning, everyone. Welcome to SINA's fourth quarter and fiscal year 2007 financial results conference call. I'm very pleased to report another strong quarter with record total revenues and earnings. We also achieved record revenues for the full year ended December 31, 2007.

The fourth quarter marked the seventh consecutive quarter that we were able to grow our online advertising revenues by 40% or more on a year-over-year basis. During the fourth quarter, we continued to see strong demand in the general advertising market in China. SINA’s traditional stronghold in automobile, real estate and IT continued to perform well in the fourth quarter and combined they accounted for 55% of the total advertising revenues for the quarter.

Once again, financial services was the best sector for advertising revenue growth in the fourth quarter, and it surpassed the IT category and became the third-largest advertising revenue contributor for SINA for the first time.

We believe that we will continue to take more market share in these four sectors in the China online advertising market. This is a further testament that SINA has increasingly become the premier website for high-end products and services with its desirable user demographics and strong brand recognition.

For fiscal year 2007, our advertising revenue grew by 41% and reached $169 million in total despite a tough comparison with 2006 in which we had the benefit from FIFA World Cup. Our strong growth in online advertising revenue in 2007 further demonstrates that our relentless pursuit for content and product excellence has paid off.

During 2007 our web traffic continued to grow strongly with page views increasing by 44% on a yearly basis. Our traffic for our user-generated content, primarily from blogs and podcasting has more than doubled during the year.

In addition, SINA is also increasingly becoming the destination website for mainstream online media content in China. More and more Chinese Internet users turn to SINA for major event coverage. For example, the full coverage of the 17th National Congress of the Communist Party of China at SINA.com in October 2007 received tens of millions of page views. The home page of the coverage alone recorded more than 4 million page views on October 22, the day when the members of the new Standing Committee of the Political Bureau of the Censure Committee made their statement. According to a third-party report monitoring the online media coverage of the event, SINA accounted for 15% of the traffic for the event coverage amongst four major portals in China.

We believe that our unparalleled media influence, strong content offerings, and desirable user demographics will continue to help SINA to take advantage of the robust online advertising market in China.

Indeed, the year 2008 will be another great year and even a better year for online advertising for the China market and for SINA. Despite a slowdown in world economy, we have not seen a slowdown in online advertising spending in any major industries we are serving in the China market. The China economy is expected to have another year of strong growth and with additional opportunities created by the upcoming Beijing Olympic games we are expecting another year of strong advertising growth.

In order to better position SINA for the Olympic opportunities in 2008, we have also taken initiatives to further enhance our leadership in the online sports area by carrying more exclusive content in addition to the rights with obtained for English Premier League and Italian Series A for live football broadcasting, we also became the exclusive new media broadcaster for the upcoming Euro Cup for both Internet and mobile in the China market.

Euro Cup is the third most popular sport event in China, after Olympic Games and the World Cup. In 2004, SINA set a new record for the traffic of online sports event coverage in China during the last Euro Cup. We believe our new media rights associated with the Euro 2008 will further enhance the leadership position of SINA’s online sports franchise in China.

Now let me turn to the mobile business. For the first time in the last eight quarters we saw sequential quarter-to-quarter increase in revenues for mobile value-added service. The competitive landscape has changed in the mobile value-added service market in China in the last couple of quarters as China Mobile started to implement a score and ranking system among mobile service providers to provide better operating policy and conditions to large and more competitive players. The new system helped curb the aggressive marketing efforts by smaller SPs and in turn provided a better competitive environment for market leaders such as SINA. Although we have seen some stabilization of the mobile business in the near term, we are cautious about how this business can further grow.

In addition, the operating margins for the mobile business may continue to be under pressure given the increase in marketing costs for traditional media, especially in this year, the rate cards for television have increased significantly. We are exploring new channels for our mobile product promotions and hope to improve our overall margin for the mobile business in the coming quarters.

On a more bright side for the mobile business, we continue to see strong growth in our free WAP portals traffic with daily unique visitors growing by another 30% quarter-to-quarter to reach 1.7 million at the end of the fourth quarter. For the year 2007, the unique visitors to our free WAP portal has tripled and the page views quadrupled.

We continue to believe that mobile Internet will offer great business opportunity in China and we intend to further invest in this area. For the year 2008, we expect that we will start to generate advertising revenues from our Free WAP portal although the total amount may not be [recurring] for this year.

Before I turn to Herman for the financial review, I would like to take this opportunity to congratulate Ms. Du Hong, our Senior Vice President for Sales and Marketing, for her promotion to the position of Chief Operating Officer. Ms. Du Hong has been with the company for eight years and has performed roles in different functions such as the Director of Business Development, Vice President of Sales, and most recently as Senior Vice President of Sales and Marketing. She has excellent track records for each and every role she played in the company. I am confident that she will continue to do an outstanding job for SINA in her new capacity as the company's Chief Operating Officer and help to take the company's operations to the next level.

With that, I am now turn to Herman for the financial highlights for the quarter.

Herman Yu

Thank you, Charles and thank you all for joining our conference call today. Let me briefly discuss the key financials for the fourth quarter and fiscal year 2007. We are pleased to report another quarter of solid growth with total revenues reaching a record high of $70.7 million representing a 25% year-over-year and 10% quarter-over-quarter revenue growth.

Both our advertising and mobile businesses exceeded the high end of our financial guidance. For fiscal 2007, total revenues were $246.1 million, which represents a 16% growth from 2006. Our online advertising business, which excludes search, reached an all-time high of $50.1 million in the fourth quarter. Online advertising revenues from China, which make up 70% of our total revenues, grew 41% year over year and 10% quarter over quarter to $49.1 million for the quarter.

The growth of our advertising revenues in the fourth quarter was driven primarily by increased spending per customer in China as well as new customer additions. Compared to the same period last year, spending per advertising customer in China grew 28% while the number of advertising customers in China increased 9%. Automobile, real estate, and for the first time as Charles mentioned, financial made up the top three segments of our advertising business, accounting for approximately 56% of our brand advertising revenues for the fourth quarter.

Advertising revenues from the financial segment continued to show strength, growing 119% from the same period last year. We also saw robust growth coming from the fast-moving consumer goods area, which reported a healthy growth rate of over 60% year over year. For fiscal 2007, advertising revenues from China grew 41% to $165.2 million.

Turning to non-advertising, for the fourth quarter of 2007 our non-advertising revenues reached $20.6 million, an increase of 11% quarter over quarter. We are delighted to see sequential growth in non-advertising revenues as the last time this occurred was in the fourth quarter of 2005. The growth of non-advertising revenues was primarily driven by the improvement of our Mobile value-added service (MVAS) business which grew 12% quarter over quarter.

Growth of our MVAS business came primarily from 2.5G products which include MMS, WAP and [Kajiva] game. These product lines grew mostly through increased marketing promotions.

Revenues from 2G products were flat at $13.3 million, that's compared to the prior quarter. SMS revenues declined $2.1 million, which was offset by an increase of $2.2 million in IVR revenues. The offset was primarily due to our shift in marketing effort from SMS to IVR during the quarter. SMS and IVR each now account for approximately one-third of our MVAS revenues.

Our other non-advertising revenues, namely search and other fee-based revenues grew 41% year-over-year to $1.9 million in the current quarter. For fiscal 2007, our non-advertising revenues decreased 17% year over year to $77.2 million. The decline in non-advertising revenues came mostly from MVAS which declined 18% year over year to $70.5 million.

Turning to gross margin, our non-GAAP gross margin for the fourth quarter of 2007 was 63%, down from 64% last year and flat quarter over quarter. Our non-GAAP gross margin for online advertising for the quarter was 65% compared to 66% last year and 65% last quarter. For fiscal 2007, our non-GAAP online advertising gross margin was 63%, compared to 66% in 2006. The decline in our online advertising gross margin mainly reflects our increased investments in content, bandwidth and web production costs.

Non-GAAP margin for our wireless business was 56% in the fourth quarter compared to 61% last year and 56% last quarter. For fiscal 2007, non-GAAP wireless margin was 58% compared to 60% in 2006. The year-over-year decrease in mobile gross margin was mainly due to increased mobile content and channel costs.

Our non-GAAP operating expenses for the quarter was $25.8 million compared to $22.4 million last year and $23.1 million last quarter. This 15% year-over-year and 12% quarter-over-quarter increases were mainly due to higher marketing expenses related to corporate branding in our MVAS business. For 2007, non-GAAP operating expenses were $92.3 million compared to $89 million in 2006, representing a year-over-year increase of 4%.

Turning to net income, non-GAAP net income for the quarter, which excludes stock-based compensation and other items, increased 35% year over year to $20.5 million. Non-GAAP diluted EPS for the quarter was $0.34 compared to $0.26 last year. Non-GAAP net income for 2007 was $67.1 million, an increase of 30% from 2006. Non-GAAP diluted EPS for 2007 was $1.12 compared to $0.88 for 2006.

Now let me briefly review our balance sheet and cash flow items. As of December 31, 2007 our cash, cash equivalents and investments in marketable securities increased $115 million from the prior year to $478 million. Cash from operations for the quarter totaled $31.9 million compared to $14.9 million for the same period last year. For 2007, cash flow from operations was $89.1 million compared to $63.1 million from last year.

Turning now to Q1 guidance, for the first quarter of 2008, we are targeting total revenues of $56 million to $58 million. For the advertising business we are targeting between $45 million and $46 million and for our non-advertising business we are targeting between $21 million and $22 million.

For stock-based compensation expense, excluding any new shares that may be granted, the company estimates that its stock-based compensation for the first quarter of 2008 to be between $3.5 million to $4 million. I should mention that a new enterprise income tax regulation went into effect as of January 1 in China this year, with many implementation issues awaiting further clarification.

Based on our current understanding of the new EIT law, our estimate of the company's effective tax rate for 2008 should be between 14% to 25%. The mid-to-low end of the range assumed that we will be able to enjoy some or all of the tax benefits that were previously granted to us, while the high end assumes that we will not be able to take advantage of the previous benefits granted to us under the new EIT regulations.

The company’s ultimate applicable effective tax rate will depend on many factors, including whether certain of its legal entities will be receive a renewal of their high-tech status under the new EIT and how dividend taxation will be applied.

The above forward-looking statements reflect our current and preliminary view and are subject to change without further notice. This concludes the written portion of our call. We are now ready for questions. Operator?

Question-and-Answer Session

Operator

Your first question comes from the line of Gene Munster - Piper Jaffray.

Gene Munster - Piper Jaffray

Good morning and congratulations. It sounds like everything is going along as planned here. Could you talk a little bit about some of these anticipated price increases -- timing, magnitude -- and how we should think about that relative to the June/September quarters and beyond? Thanks.

Charles Chao

Gene, are you talking about the price increase for the advertising rates?

Gene Munster - Piper Jaffray

Right, exactly. The advertising rate price increases.

Charles Chao

Well, I think we have had this discussion many times before and each year we will raise our advertising rates two times on a semi-annual basis and we intend to do the same thing this year. Historically, the advertising rate increase approximately accounts for 50% of our revenue increase on a yearly basis, basically. We probably will expect the same pattern, a similar pattern this year.

Having said that, of course there will be extra inventory created because the Olympic Games are in Q3 and I think from that our extra inventory pricing might be very different depending on market demand. We fully expect that there will be pretty competitive rates for this year, especially during Q3.

So in general, I don’t see any abnormal trend or pattern in this area and it should be pretty consistent with what we have seen in the past, basically.

Gene Munster - Piper Jaffray

The Olympic inventory, I assume you’ve already started to pre-sell much of that inventory, is that correct?

Charles Chao

Yes, but I think not necessarily on a very fixed term in terms of what kind of inventory and at what price that are being sold right now. I think that what we’re doing is a framework in terms of the budget from each sponsor advertisers for particular Olympic inventory and we will price as we go, really depending on the demand.

Gene Munster - Piper Jaffray

Is it safe to say that as we go through the year in June and September quarters that we should obviously see an acceleration in the advertising growth rate because of what you just mentioned, is that correct?

Charles Chao

In Q3 in particular that’s true, yes.

Gene Munster - Piper Jaffray

Q2 as well, or?

Charles Chao

Q2 I think it is more like normal inventory that it’s not necessary the inventory we sold for Olympics per se but general inventories that we sold, maybe to the Olympic sponsors, maybe to the non-Olympic sponsors with related Olympic themes but they are not necessarily something specifically related to the Olympic Games.

Operator

Your next question comes from Jenny Wu - Morgan Stanley.

Jenny Wu - Morgan Stanley

Regarding first quarter guidance, it appears to be weak. We understand it is because of seasonality at this time and because of the snow storm. Please help us quantify how much impact may come from this snow storm? Thank you.

Herman Yu

I think the Q1 guidance is pretty consistent in terms of the pattern we have seen in the past in terms of seasonality. If you look back three years, I mean, every year we had a decline in Q1 compared to previous Q4, and the range normally is around 10% or sometimes a little bit over 10%, and other times a little bit less than 10%. I think the pattern we have seen here is very consistent from what we seen the past, a normal pattern.

In terms of the impact from the snow storm, I mean it’s really difficult to quantify. Historically, when you have this kind of natural disaster it did not have any material impact on our web operations as well as advertising dollars. In general I think there might be some minor impact, but we really don’t see it has too much weight on the guidance we are giving at this point, basically.

Jenny Wu - Morgan Stanley

The other question is regarding your alliance with Google. Would you please help us understand how much of your contribution may come from this alliance so far?

Herman Yu

In total as we explained before, the Google alliance brought in two parts of revenue, one is from the search side in terms of the traffic created for Google from the SINA side and the other is from AdSense for the keyword product. In total I think that the revenue generated from the Google partnership increased slightly. I think the range is about 20% to 30% quarter to quarter.

I think most of the growth is actually coming from AdSense at this point, and not so much growth from the search side at this point. We are continually working with Google to improve the performance of search so we can generate more revenue from the search side in the coming quarters.

Operator

Your next question comes from Wallace Cheung - Credit Suisse.

Wallace Cheung - Credit Suisse

In the first quarter, are we going to see the costs for the bandwidth impact, is that going to increase a lot, because you actually have to buy a lot of bandwidth and servers.

Secondly, a little more guidance on the sales and marketing cost trends, because it seems to be a very influential cost item. After the corporate branding in the fourth quarter, will there be a similar kind of spend in the first quarter of ‘08?

Herman Yu

Wallace, can you repeat the first question? We didn’t get that.

Wallace Cheung - Credit Suisse

Sorry about that. Relating to the bandwidth and server costs for the brand advertising margin, how would you see this trend in first quarter because normally you can foresee there will be substantial growth in traffic; maybe you have to spend a lot of costs in the first quarter. Thank you.

Herman Yu

I think with regards to the bandwidth and the server costs, you won’t see too much anomalies from what you have seen in the last few quarters. With regards to the brand costs, I think we will continue to emphasize our corporate brand promotion so the Q1 spending should be somewhat consistent with Q4.

Wallace Cheung - Credit Suisse

The second question on the sales and marketing costs?

Charles Chao

On the sales and marketing side, Wallace, I think your first question was regarding the impact of the costs on the brand advertising gross margin, right?

Wallace Cheung - Credit Suisse

Yes.

Charles Chao

I think in Q1 there’s still going to be some increase, but not material. So basically you will see a dip in gross margin for brand advertising as you’ve typically seen in our financial statements each quarter in Q1 in the past. With continued growth in the traffic and user base, we expect that the server and bandwidth costs will increase, but because of the decline in revenue in Q1, you will see a typical decline in gross margin in Q1. That is very consistent in terms of patterns that we have seen in the past.

In terms of sales and marketing, Q4 is typically a heavy quarter for our promotion and different marketing activities. I think the sales expense is more in line with the percentage of the sales revenue. In marketing we typically spend more in Q4 versus Q3. In Q1 going to ‘08 if you looked at the entire 2007, we did not spend that much money in terms of brand promotion in the market. Going into ‘08, we intend to spend more overall for the entire year, especially in the period leading up to the Olympic Games.

I think that Q1’s marketing costs probably will be more consistent, maybe slightly less than what you have seen in Q4 ‘07, and going into Q2 we’ll probably spend more.

Wallace Cheung - Credit Suisse

A follow-up on the first question regarding the bandwidth costs. If we are going to see the traffic increase in the first quarter, how will the cost of goods sold trend in the first quarter? Thank you.

Charles Chao

I think in terms of the total cost of sales in Q1, it is not going to be too different from what you have seen in Q4, in terms of the costs for bandwidth and server depreciation and production costs. There might be a slight increase in the content cost as we gradually build our content for this year, basically.

As I just mentioned, there will be a dip in gross margin because the cost did not really decrease, but the revenue decreased.

Operator

Your next question comes from the line of Leah Hao - Goldman Sachs.

Leah Hao - Goldman Sachs

Very solid quarter. I was wondering if you could give us your expectation of spending patterns by each vertical for 2008? You have mentioned financial services obviously grew a lot during Q4 which is great, I was just wondering about your outlook for the full year ‘08.

Charles Chao

I cannot give you a very specific number in terms of percentage of growth for each sector, but I can tell you these three top sectors were the major driver for our advertising revenue growth in 2008, namely: automobiles, real estate and the financial services.

I think not necessarily in terms of percentage growth, but in an absolute dollar amount of growth, these three sectors were determined to be the major, major growth driver. Following that probably will be the consumer goods, and the new categories.

Leah Hao - Goldman Sachs

Can you give us the number of advertisers in Q4 versus Q3?

Herman Yu

It’s over 600 advertisers, so it’s about flat quarter over quarter.

Leah Hao - Goldman Sachs

Do you see advertiser spending per account pick up for smaller accounts versus larger accounts? What degree of pick up do you see in your advertiser base?

Charles Chao

Can you repeat the question, Leah? I did not quite get it.

Leah Hao - Goldman Sachs

Sure, I’m sorry. I was just wondering about the advertising spending per account pick up between smaller accounts versus the large accounts in Q4.

Charles Chao

In Q4 the revenue growth is coming from the advertising, spending more money for each account. I think it’s a combination of both in terms of the two factors you mentioned, but the most is probably coming from increased spending from big customers.

Leah Hao - Goldman Sachs

Can you give us a specific revenue breakdown by product category for wireless VAS.

Herman Yu

We’ll give you that offline, Leah.

Operator

Your next question comes from Eddie Leung - Merrill Lynch.

Eddie Leung - Merrill Lynch

Could you please elaborate a little bit more on the strength of the financial segments that we have seen? What kind of demand are you seeing? Is it mainly from insurance companies, investment funds and is it related to the stock market and how much exposure do you have on the potential downturn of the stock market? Thanks.

Charles Chao

So far I think that the revenue from the financial sector is primarily from two areas. One is from the commercial banks in China and the other is from the investment funds; it has a lot to do with the stock market itself.

But I think that this trend is going to continue. These two sectors, areas I mentioned continue to do well given the competitive environment in the China financial market right now among the commercial banks as well as among the different investment funds.

Going forward, I think there will be more contribution, I think in terms of dollar amount from other sectors like insurance companies just mentioned and other financial investment funds.

In terms of the stock market impact on the financial services, I think sometimes when the stock market is coming down slow you probably will see some traffic decrease from time to time for the stock-related page views. But overall I think because of the huge run in the financial market, stock market in China in the last year or year-and-a-half I think there is a huge increase in terms of interest from the customers/consumers in terms of their attention to the stock market as well as to all sorts of investment opportunities in general. I think that the habit has been developed so there will be enough attention to financial services in general going forward; I’m not too worried about that.

On the other hand, I think that the demand for advertising for financial services just started. I think in terms of dollar amount of total for the entire financial services in China, I am talking about the general advertising market, is still relatively small compared to other categories. There is a lot of room to improve and to increase our overall basis going forward. I think this just started.

Eddie Leung - Merrill Lynch

Could you also give us an update on the restructuring of your online game offerings that you mentioned last quarter? Thank you.

Charles Chao

I’m sorry. Restructuring on what?

Eddie Leung - Merrill Lynch

Of your online games offering.

Charles Chao

I think I discussed briefly last quarter in terms of our online gaming initiative, what I said was basically that we’re not going to get into the game operation, our RPG game operation ourselves, in near term but rather we want to create some sort of platform for online game players in China to allow them to have better tools and a platform to play games and to receive services associated with games.

With respect to that area, we recently soft launched our new product called UGC. It is a client-side product which aggregates a lot of high service functions like audio IM and the display of different games and other features. We just soft launched this product and hopefully that will attract a lot of users for this particular platform so that this platform can be used in the future for different games promotions to allow players to play different games on the same platforms as well as over the longer term allow game players to trade different items in different games on this particular platform.

We just launched this product a couple of weeks ago and it’s still in the beta testing period, basically so I will give you more updates in the next quarter.

Operator

Your next question comes from Jason Brueschke - Citi Investment Research.

Jason Brueschke - Citi Investment Research

First on the wireless VAS, it’s been a really troubled business for probably the better part of the last year and you mentioned in the prepared remarks that there’s been a stabilization in the market. As you look out in the 2008, is that stabilization something that we expect to continue?

I know last year you pretty much got maybe a double-digit decline each quarter; should we be thinking that this is kind of bottomed and flat at these levels or should we be more cautious than that?

Charles Chao

I mean it’s really difficult to say, Jason. As I said in my opening remarks, we see that stabilization near term, but we are cautious about how this business will go over the longer term. The current environment actually provides better conditions for large service providers in China to perform better than before because China Mobile really had the system; essentially they squeezed out a lot of smaller players in the market so there will be fewer players. As you recall in the past at the peak times there might be thousands of SPs competing in this market. With the new rules and new regulations I think there will be fewer and fewer players in the market. That obviously will help us to generate more in terms of at least the market share in the mobile value-added service.

In general, I think the current business total size is not really increasing too much based on its current product and service pattern. I think there should be a lot of innovation in the product side in order for this business to really grow. I think a lot of SPs are still exploring the new innovations at this point and the only thing that I can tell you is that for at least near term we are not seeing a decline or maybe see some small increase quarter over quarter. But if you look at the entire ‘08, its too early for me to give you a very, very comfortable picture. Overall at least we hope that ‘08 will not decline compared to ‘07 I mean on an overall basis.

Jason Brueschke - Citi Investment Research

Regarding the monetization of some of your web 2.0 properties, could you maybe update us on the current state and then maybe the plans in 2008 for specifically the monetization of your blogs as well as you had mentioned in the prepared remarks some advertising on your free WAP portal? Maybe give us a little bit more color about the timing but also if you look out a little bit further, you have high expectations that both of these will someday, maybe a couple of years down the road, be material revenue generators for the company? Thanks.

Charles Chao

Over the longer term we are pretty positive in both areas in terms of generating more revenues from the user-generated content or the communities as well as from the mobile side.

In terms of an update on our experiment on the user-generated content, especially on the blog side, we did have some pretty good experience in Q4 and that continues in Q1. What we did was we selected a few hundred different blogs and tested the effectiveness of advertising in these blogs and tried to establish a system to share that benefit with the bloggers. So far I think that we have good news and bad news. The good news is that some of the blogs actually really generated very good advertising results. I think among the bloggers we tested, the blogger can generate about -- the highest is probably RMB 30,000 per month in terms of the advertising dollars share. But I think this is not a result across the board and so we need to do more testing in this area.

But more importantly, I think the experiment tells us we probably need a better system in terms of allowing the bloggers to more automatically participate in the advertising activities for their own blog and that probably requires more time for us to develop a system.

To answer your question, over the longer term we are very, very positive that with this increased traffic and the larger user base that there will be some very good return in terms of advertising in this area.

For the WAP side, for the mobile Internet, obviously we have seen a very good traffic increase in ‘07 and we expect that China will continue to increase in ‘08. If you look at the recent report issued by CINIC, China has about 210 million Internet users at the end of ‘07 and in the same report it also says that China had about 15 million mobile Internet users by the end of ‘07. That means that there are enough mobile users for a mobile Internet in China already and the question really is the frequency of the mobile Internet usage in China and how much they spend on mobile Internet.

But given our experience and our projection, we will probably see much accelerated growth in terms of the number of users in the mobile Internet going forward in China, and that will allow us to commit enough users and traffic to really start to monetize the mobile Internet going forward for our advertising model.

So this year our plan probably is to do more experimenting in this area because mobile Internet, although we can play brand advertising on that, probably it’s more suitable for a more target-based advertising and that requires building up the sales channel in China either we partner with somebody else who is already in a sales channel or we will have to build it ourselves.

That will take some time but that’s why I said the demand may not be material; it will be more instrumental in ‘08. We’re not expecting that much for ‘08, but in ‘09 and 2010 we’ll probably see more revenue from the mobile Internet.

Jason Brueschke - Citi Investment Research

On the tax rate, do you have any kind of feeling for when we’ll get some resolution in that? Is that going to be resolved this quarter or before the next results?

Then I think Herman in his prepared remarks, I came away with a little bit of an impression that it may be kind of binomial. There is either going to be a good scenario which is going to be down around 14% or 15% where you kind of get the renewal of your tax breaks for being high tech, et cetera. Then there’s a bad case where maybe it is closer to 25%.

Is that the way we should think about it or could there be a blended rate somewhere in the middle depending on the various entities that may or may not get the renewal?

Herman Yu

With regard to when the issue will be resolved, as of right now it’s really hard to say because even among the accounting firms there isn’t a consensus right now on how to actually implement. The law was just given out and certain things are very general and depending on how you implement it, you can get different resolution or conclusion.

With regards to the binomial, I would say that not so much a binomial, but I would say that if we do get the benefit it would probably be closer – you know, 14% to something like 18%; if not then it will probably be in the upper range.

Jason Brueschke - Citi Investment Research

Thanks guys and congratulations on the quarter.

Operator

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

George Chu - UBS

Just a question regarding your video delivery; I remember a few quarters ago you mentioned video delivery is actually a negative on the margin given the cost of the bandwidth delivery is fairly high compared to the typical visual delivery. Could you talk about the economics in that?

Charles Chao

Video actually consumes a lot of bandwidth, as everybody knows. We have not really monetized too much of our inventory yet. So in general it’s reflecting our cost of sales on the bandwidth side, and I think as the video traffic continues to grow, that will have some impact but not much impact on our costs because we have a partnership with China Telecom which under the agreement they will provide us with free bandwidth for our podcasting service, at least.

For our video we have different products; we have video live broadcasts, we have VOD, we have podcasting. Podcasting probably is the platform in January, more traffic than any other platform at this point, and for that we’re actually now ramping up additional bandwidth going forward, at least for the next year or two. So I think that will be an impact but it’s not going to be material on an overall basis for the video costs.

George Chu - UBS

On the monetization of the blogs, I realize that AliMama had recently been fairly aggressive in targeting the small blogs or small websites and trying to monetize their traffic. I just want to understand the comparative landscape there. Do you perceive them as a major threat or do you only think they could be a competitor in the smaller blog space whereas the bigger celebrity blogs, that’s the area where you have bargaining power? Thank you.

Charles Chao

Well, AliMama obviously is a new product that seems to be very interesting in the marketing channel right now and what it does is to help a lot of small websites and small customers/advertisers to place their ads with small websites or the blogs you just mentioned. So I think it’s more like any network product, but our platform is probably more catered to our own blog site at this point. So the pattern will be different and we may generate some of the advertising dollars from SMEs but more so probably from brand advertisers at this point. So there will be some competition, but fundamentally these two are different products, basically.

George Chu - UBS

If we want to monitor the monetization of blogs, should we be looking at the web pages, at the top five blogs on SINA as an indicator?

Charles Chao

No, I don’t think so. I think, obviously the blog with the highest traffic will generate more advertising dollars in the results, but that probably is not something that will be emphasized. I think our emphasis will be trying to create some platform suitable for all blogs on our website so that it can be sold; not really on each blog but really on the entire blog platform, basically.

Operator

Your next question comes from Wendy Huang - Bear Stearns.

Wendy Huang - Bear Stearns

First of all, your advertising revenues increased 41% year-over-year in 2007, and based on some third-party research the brand advertising market in China actually grew 65%. Could you give us some updated view on the competitive landscape in that market and which players in your view are actually gaining market share and accelerating growth going forward? Thank you.

Charles Chao

I don’t know which report you’re citing here. 65%, does that include search?

Wendy Huang - Bear Stearns

No. It’s just brand advertising.

Charles Chao

Well, okay.

Wendy Huang - Bear Stearns

Can you give some views on whether you think it’s big players like Tencent or Baidu are gaining market share or whether it’s more from the small websites emerging in China?

Charles Chao

I think on the brand advertising side, obviously the major competitors for us are still from different portals. We have actually discussed this question before, but in general market for brand advertising, you will see actually more competition from the vertical sites. I mean, that happened in ‘06 and ‘07, that will continue in ‘08, ‘09 and beyond. I think that’s pretty normal.

Any online advertising market, initially the portal actually has the majority of the dollar for brand advertising because of the size and because of the ability for each portal to build up their sales system channels in the market. But when the market for each of the vertical sites starts to develop, once the verticals have become big enough they will be able to build to their own sales system, or when the advertising agency system becomes more mature, they will be able to allocate more dollars to the vertical sites.

Basically for ‘07, we’re not seeing a decrease in terms of market share among the major portals in China for SINA in terms of brand advertising, but overall I think if you look at the overall brand advertising market, the vertical sites obviously are taking more market share from the portals as a group. That trend is inevitable, I think, in any market and I think it’s a healthy trend given that the vertical sites now are able to actually provide more meaningful traffic, especially in their respective areas. I think that trend will continue in the future.

That means the vertical sites will continue to gain a little bit more market share in the general brand advertising market, mainly I think because they are off a much smaller base so percentage-wise they will increase more vis-à-vis portals.

I think that’s pretty much the picture, but I think the good news is the overall market is growing fast enough so everybody will have pretty healthy growth in the future.

Wendy Huang - Bear Stearns

We have seen some consolidation among the new media advertising agencies in China, so how do you think that will affect portals like SINA? Will you see increasing bargaining power towards them or decreasing?

Charles Chao

Well I think that’s a very good question. Really in terms of the competition for brand advertising, it’s not just among the portals; it’s not just among the websites, but it’s also among the Internet companies vis-à-vis all sorts of new media companies like outdoors like LEDs, LCDs and different kind of new media companies. It’s true that these new media companies, when they come out they will get more market share compared to the past, basically.

But I think the pattern is also that these new media companies a lot of them utilize the video platform so the trend is that it’s not like they’re only taking market share away from the Internet companies, but also from TV stations. It’s really is an addition to the entire media space, not necessarily that we see them as direct competitors, but they have an impact on the overall advertising market.

Wendy Huang - Bear Stearns

My second question is about your wireless business. Could you elaborate on the new policies you mentioned released by China Mobile recently, and help us to understand why you think it’s favorable to big players but it will squeeze out the small players in this market?

Charles Chao

Well I think that the new system will allow a score system based on the volume of your business and based on how each company can abide by the regulations and operating policies imposed by China Mobile. So the big players obviously have a much better ability to create more volume for China Mobile as well as they tend to follow the rules by China Mobile more closely than the small players.

By ranking high in the system, you actually get better treatment from China Mobile in terms of the service and in terms of the pricing structure. Inevitably that will be favorable to big players in the market.

Wendy Huang - Bear Stearns

My final question is on your WAP business. You just mentioned the timing to monetize on your free WAP portal will be around 2010. Could you help us understand what kind of business model you will apply to that free WAP portal with your wireless advertising? Are you going to sell it as a package to your advertisers, I mean a bundled package of Internet advertising and wireless advertising? Thanks.

Charles Chao

I think our free WAP model, currently our existing business model will be from advertising and to answer your question, we have already started to bundle this advertising with our Internet advertising customers. We have not really separated to monetize the WAP alone. But we have adopted a bundled approach.

What I’m talking about in the opening remarks is that we will start to monetize the WAP portal separately. That means we’re going to start advertising separately on the WAP portal starting from ‘08.

But I think for this year, because we just got started, there will be some time we need to build up the sales channel and the customer base for this type of advertising. The revenue will not be material until a year or two from now.

Operator

Your next question comes from the line of C. Ming Zhao – SIG.

C. Ming Zhao – SIG

Can you tell us roughly what percentage of your ad sales is through focused media or associated ad agencies such as the joint venture with [Xinhua]? Some reports are saying that you are negotiating with online portals about rebates. Can you comment on that?

The second question is for the Google alliance generated revenue, both on search and the branded advertising side, in your Q1 guidance for those revenues, do you see the same weak seasonality in the Q1 as your branded advertising? Thanks.

Charles Chao

Okay. For the first question, regarding Focus Media, Focus Media as you know have aggregated a lot of agencies for online advertising in China. Effectively if you are adding and [Xinhua] partnership probably they account for approximating 30% of SINA’s online advertising revenues in ‘07 and that’s probably the same percentage that we saw in Q4 also. I don’t have an exact figure for ’07; I think it was about approximately 30%.

And yes, they are negotiating with different portals and websites for better terms in terms of rebate. I think this is fine in the market because, I mean rebate is a function really of sales volume. What we really look at is the net revenues we can generate from these advertisers and the sales agencies. I think that we have not really reached agreement yet.

I think the overall impact should not be that material in the future.

For the second question regarding Google, at this point for Q1 guidance we are expecting similar revenue trends we saw in Q4 for Google. For search side it’s not going to be impacted by the seasonality because it’s more a function of the traffic.

For the AdSense, it’s hard for me to tell you because we really don’t have control over that. It’s more like the advertising sold by Google through the network. So I cannot particularly comment on that. But in general, I don’t think we will be impacted too much by seasonality.

Cathy Peng

I think this is the end of this conference call. Thank you, everyone for joining us today. If you have further questions, please feel free to contact us. We’ll see you next quarter.

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Source: SINA Corp. Q4 2007 Earnings Call Transcript
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