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Executives

Cathy Peng - Investor Relations Manager

Charles Chao - President and Chief Executive Officer

Herman Yu - Chief Financial Officer

Analysts

Jason Brueschke - Citigroup

Richard Ji - Morgan Stanley

Wallace Cheung - Credit Suisse

Eddie Leung - Merrill Lynch

C. Ming Zhao - Susquehanna Financial Group

Paul Wei - Lehman Brothers

Vivian Li - Piper Jaffray

Dick Wei - J.P. Morgan

Leah Hao - Analyst

Elinor Leung - CLSA

SINA Corporation (SINA) Q2 2008 Earnings Call August 6, 2008 9:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to SINA Corporation’s second quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference, Ms. Cathy Peng, Investor Relations Manager. Please go ahead, Madam.

Cathy Peng

Thank you. Good morning. Welcome to SINA's earnings release for the second quarter 2008. 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 relation section of the SINA website.

Before the management presentation, I would like to read to 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 statements.

Further information regarding these and other risks is included in SINA’s annual report on Form 20-F for the year ended December 31, 2007, and its other filings with the Securities and Exchange Commission.

Additionally, I would like to remind you that our discussion today includes non-GAAP measures which exclude stock-based compensation, as well as other items. We use non-GAAP measures to exclude certain items that are not expected to result in future cash payments that are non-recurring or that may not be indicative of our core operating results. For further explanation of our non-GAAP measures and detailed reconciliations between our GAAP and non-GAAP results, please refer to our earnings release.

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

With that, I would like to turn the call over to our President and CEO, Charles Chao.

Charles Chao

Thank you, Cathy and good morning, everyone. Welcome to SINA's second quarter 2008 financial results conference call. I am very pleased to report another strong quarter with record revenues and earnings. We are very excited that the momentum in the growth of our core business in online advertising and mobile value-added service has continued to accelerate in the second quarter.

For the second quarter, our total revenues grew by 52% year over year to reach $91.3 million; our advertising revenues grew by 58% year over year and 36% quarter over quarter to reach $64.9 million. Our non-GAAP net income totaled $26.2 million, representing a 62% increase from the same period last year, and a 33% increase from the previous quarter.

Now let’s take a closer look at our performance for the second quarter. During the second quarter, with the start of the Olympic Torch relay, the competition among Internet portals in China to brand exposure and advertising dollars has intensified. Despite a very aggressive marketing campaigns by our major competitors, SINA continued to maintain a leading position in terms of [relevant] information from our Internet portals in China according to various independent research. More importantly, we have further enhanced our position as the leading online advertising platform in China by recording the highest quarterly growth rate for advertising in the last five years.

In the second quarter, we continued to see accelerated growth for our advertising in the China market. On a year-over-year basis, advertising revenues for China grew by 59%. SINA's strong verticals continued to perform well and advertising revenues from automobile, finance, and real estate combined grew by 92% on a year-over-year basis, accounting for 58% of our total advertising revenues for the second quarter.

Real estate overtook financial service as the best performing sector for the ad revenue growth in the second quarter with 159% year-over-year growth. We believe that we will continue to be very competitive in these vertical areas in the future.

According to newly published semi-annual China Internet report by [PNIC], the number of Chinese Internet users reached 253 million by the end of June 2008, making China the country with the largest Internet population.

The rapid growth of China’s Internet population has significantly increased penetration of Internet media in China, especially in [northern] areas, making Internet an increasingly competitive media for marketing purposes.

Despite a slowdown in the Chinese economy and the decline [inaudible] and housing markets, we see a continuing shift of marketing dollars from traditional media to online as advertisers seek more cost-effective marketing campaigns, as well as better reach for a more [affluent] audience.

Another encouraging result from the recent Internet report is that more than 81% of Chinese Internet users get their news from the Internet. This figure is almost 10% higher than the previous survey and it is also higher than that of most other countries, and it is a strong indication of the power of the Internet media in China. This trend is in favor of our future growth [inaudible] and undoubtedly the most influential online media company in China.

SINA's media influence was further demonstrated in the coverage of the recent massive earthquake in Sichuan Province in China. During the earthquake coverage, [inaudible] integrated all our interactive communities, including blogs, podcasting, and video into our news coverage.

Not only did we provide up-to-the-minute news and information relating to the earthquake and afterwards the rescue effort, we also connected the people, mobilized the nation, and promoted the spirit of [inaudible] and unity. As a result, our traffic increased significantly and our brand imaging was enhanced.

Tomorrow is the opening ceremony of the Beijing Olympics Games. SINA is fully prepared to present the very best online media coverage of the event to our Chinese Internet users and to provide a state-of-the-art marketing platform for our customers. 10 years ago, SINA made its name in China by successfully covering the French FIFA World Cup through the Internet. Since then, every major sports event coverage has helped SINA to create traffic records and take its brand to the next level. We are confident that we will repeat our success this time.

In the third quarter, we will incur significantly higher content costs for the Olympic Games and we will also spend extra marketing dollars to promote our brand, which in turn will impact our margins negatively. We believe these are the right investments to make as these investments will bring in new users and new customers, which will help us build the foundation for our growth in the long-term.

Now let me turn to our mobile business -- we are pleased to see that the mobile business continued to [live] on in the second quarter with 13% growth quarter over quarter and 44% growth year over year. We are also pleased to see continued [inaudible] of product lines, as well as continued diversification of marketing channels for our mobile business. MMS, [inaudible], and SMS were the key products that drove the [inaudible] growth in the second quarter.

While the market for mobile value-added service remains competitive, we are happy to see that the regulatory environment and operating margins have become more stable.

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

Herman Yu

Thank you, Charles and thank you all for joining our conference call. I will now take you through the key financial highlights. Total revenues for the second quarter of 2008 hit an historical high of $91.3 million, representing a 53% year-over-year growth and a 28% sequential growth. Our online advertising revenues, which exclude search revenues, for the second quarter of 2008 were $64.9 million, representing a 58% growth year over year and 36% growth quarter over quarter.

Advertising revenues from China in the second quarter grew 59% to $64.3 million. Revenues per advertiser in China increased 36% year over year while the number of customers in China grew 17% year over year.

Our top three customers segments continued to show strong growth momentum. Automobile grew 77% year over year, while financial services grew 91% year over year, on top of a three-fold increase last year. Our partnership with one of the largest real estate agencies in China, e-house, is proving to be the right strategic move. Real estate advertising revenues in the second quarter were up 139% year over year and 46% quarter over quarter. Online advertising revenues during the quarter accounted for 71% of SINA's total revenues, compared to 69% last year.

Turning to our non-advertising business, for the second quarter of 2008, our mobile business grew 44% year over year, or 13% quarter over quarter to $24.5 million. SMS and IVR collectively represent 53% of total MVAS revenues grew 8% quarter over quarter, while revenues from 2.5G products, which includes MMS, WAP, and [Cojiva], increased 19% sequentially.

Now let me turn the discussion to gross margins. Our non-GAAP gross margin for the second quarter of 2008 was 63%, same as last year and higher than the 60% margin last quarter. Our non-GAAP advertising gross margin for the second quarter was 65% compared to 63% last year and 62% last quarter. The improvement in gross margin was due to strong growth of our advertising revenues while inserting prudent decision making in the purchase of online content and other cost items.

Non-GAAP gross margin for our MVAS business in the second quarter was 55%, compared to 61% last year and 56% last quarter. The gradual decline in our mobile margin can be mostly attributed to the increasing revenue share to our channel partners.

Turning to operating expenses, our non-GAAP operating expenses for the second quarter of 2008 was $33.4 million, up 47% year over year and 29% sequentially. The increase in operating expenses was primarily driven by higher marketing spending and, to a lesser extent, higher engineering and sales related payroll and other personnel expenses.

Turning to operating income, our non-GAAP operating income was $23.7 million, up 58% year over year and 40% quarter over quarter. Our non-GAAP operating margin for the quarter was 26%, improving one percentage point from last year. The one point margin improvement allowed our non-GAAP operating income to grow five percentage points faster than total revenues on a year-over-year basis.

Provision for income taxes for the second quarter of 2008 was $4.2 million, assuming an effective PRC income tax rate of 16%. We currently expect to have a similar effective tax rate for the rest of the year.

Turning to net income, non-GAAP net income for the quarter, which excludes stock-based compensation and other items, was $26.2 million, an increase of 62% from last year and an increase of 33% from last quarter. Non-GAAP net margin for the second quarter was 29% compared to 27% last year. Non-GAAP diluted EPS for the quarter was $0.43 compared to $0.27 last year.

Turning to our balance sheet and cash flow, as of June 30, 2008, our cash, cash equivalent, and marketable securities were $540.9 million, compared to $478 million at the end of Q4 2007.

The cash flow from operations for the quarter was $25.3 million, compared to $20.9 million for the same period last year. Capital expenditure for the quarter was approximately $7.9 million. We have accelerated our capital spending during the quarter to support our strong traffic performance, as well as the recent launches of our web 2.0 products, including SINA TV, SINA Space, SINA Mini Music Player.

Let me now turn to our guidance for the third quarter of 2008 -- we are targeting total revenues of $100 million to $104 million; for online advertising, we are targeting $75 million to $77 million; for non-advertising business, we are targeting between $25 million to $27 million. Excluding any new shares that may be granted, we expect stock-based compensation to be between $3.5 million to $4 million for the third quarter.

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 Jason Brueschke. Please proceed.

Jason Brueschke - Citigroup

I have two questions -- the first one is about the competitive position in advertising, and it’s a two-part question. Then I have a question about gross margins. The first question is I want to know about your views on SINA's competitive position and advertising demand. And what I’m wondering is hypothetically speaking, if China were to see GDP growth slow in 2009, could you comment on whether first you would expect online advertising in general to be more insulated from a possible slowdown in overall advertising demand in China compared to say traditional media?

And secondly, if we were to assume that online advertising, for whatever reason, were to slow down as well, could you comment on whether you would expect SINA, given your competitive positioning, would you be expected to fare better in a slowing online advertising market versus your other brand advertising competitors? And then, as I said, I have a follow-up question on gross margins. Thanks.

Charles Chao

You’re right. I think as we all discuss these days that the overall macroeconomic conditions in China is slowing down a little bit in terms of the growth and especially in certain areas, like the stock market and housing market, you see declining in recent months. And the general view is that it’s not going to get better in the near future, I mean, in the next few quarters.

And in terms of the advertising business, overall I think you did the right comment that there will be some sort of slowdown overall on the advertising market in general, given the economic condition in China. There’s no question about that but as I commented in my opening remarks that we do not really expect that online will be impacted that much on an overall basis, given that the Internet population is growing very fast in China and people become more selective in terms of their media selection for their advertising and online obviously is one area that is getting more market share vis-à-vis the traditional media.

And I believe that given that overall situation, we still believe that online advertising is still going to grow very nicely in China. I mean, if you want me to comment on SINA's position in this particular market and given the overall situation, it’s really difficult to quantify but given our experience and our advantage we have, that we have always spoken to the investors that we are the largest Internet portal in terms of a lot of things in China and more importantly, we do actually possess some of the most Internet users in terms of demographics, in terms of being more educated, high-end, and more desired for advertisers.

And we also, as you know, we are very, very strong in terms of building our -- the overall sales system, sales channel, and the sales strategies in China in terms of online advertising, [the media] -- online advertising in the brand area in many, many ways, so we’re pretty confident that we will remain very competitive [inaudible] competitors in this online advertising market. But how to exactly quantify it is probably very difficult to say.

Jason Brueschke - Citigroup

Charles, just a follow-up to your comments, which are very helpful -- are you expecting that maybe large brand advertisers are going to end up spending relatively more, even in a weakening economic environment than maybe smaller SME type advertisers? And given the fact that you have a lot -- a lot of your revenues comes from very large companies in large, high-dollar verticals. Does that provide another layer of insulation versus maybe some other companies out there that are getting a lot more advertising from the SME customer base?

Charles Chao

I think that’s probably correct. I mean, that’s our feeling also because although we are talking about overall market sentiment, the sentiment is not that great in China right now but we really don’t see too much budget cuts or -- I mean, from a lot of big customers and in fact, we are seeing some of the more allocations from some big companies to Internet here in China.

So it’s overall a mixed picture and your sense is probably right that -- especially for big companies. They tend to allocate more dollars to the new media and going forward, given our experience in this market, and SMEs tend to be more reluctant in some way because these are the ones that are less sophisticated in terms of new media advertising and they are more reluctant to put their dollars in a new media given the overall situation here.

Jason Brueschke - Citigroup

Great, and then my question on gross margins -- you were able to hold your non-GAAP gross margins pretty constant on a sequential basis, despite increased content costs associated with Euro 2008 and others, in part because of faster revenue growth. In your prepared remarks, you indicated that content costs as well as sales and marketing costs are going to be higher in the third quarter, but you also have given us a very nice revenue growth guidance for the third quarter as well. Should we be expecting gross margins to be flattish sequentially in Q3? Or, given the magnitude or the relative magnitude of the cost versus the revenue, should we be modeling somewhat of a sequential decline in your gross margins in the third quarter? Any color you could give us on that would be helpful.

Charles Chao

I think we can talk about that. The gross margin for advertising in Q3 will come down from Q2’s level. There is no question about that, although we are projecting a much higher revenue for Q3 for advertising. But given the very large amount of content investment we make for the Olympic Games, you guys probably heard a lot of things in the content areas in China. We have secured a lot of good content for the Olympic Games from different traditional media companies, from different news agencies, from the -- a lot of -- like live data, so on and so forth, especially -- we have also purchased the [inaudible] VOD rights for the Olympic Games. All these together adding to a big amount for the total content costs for the Olympic Games. But you should also be aware that a lot of these Olympic related content costs are not recurring and as I said in my opening remarks that a lot of this content we’re investing here today for two purposes: one obviously to provide the great coverage for the Olympic Games so we can attract a lot of users, and also secondly, we are also doing this for promotion so that we can further enhance our brand recognition in the China market through this very, very important and successful event coverage in China.

So I think this will hurt Q3 but it is going to be temporary and in Q4, we fully expect that gross margin will go up from the Q2 level and from the Q3 level, as we are not going to incur these non-recurring content costs, basically.

Operator

Your next question comes from Richard Ji from Morgan Stanley.

Richard Ji - Morgan Stanley

I have two questions, and let me start with the first one in terms of your 3Q revenue guidance. Obviously you guided for a very [robust] 3Q revenue growth. Can you shed a little color on the advertising rate increase recently? And also, what is the expected contribution from your Olympics channel? And I have a follow-up. Thank you.

Charles Chao

In Q3, we actually do not raise our normal rate card in Q3. We typically do that every two quarters, so it’s in Q2 an Q4. So our normal rate card did not increase but for Olympic Games, the inventories that are created for the Olympic Games only at the new site, so these -- I mean, we call these [incremental] inventories so we sell at a very different rate. It’s a more demand/supply issue versus our normal kind of rate card pricing structure.

So this is really difficult for me to comment in terms of exactly the rate increase for Q3, given that Olympics is a special event occurring. But to answer your question, our normal rate card did not increase.

And was your second question regarding the advertising for the Olympic Games?

Richard Ji - Morgan Stanley

No, actually another question is when we look at your top three advertising categories, including automobile, financial service, and real estate, and it all demonstrates a very robust growth in the previous quarter, yet these sectors are all struggling in terms of year-on-year growth going forward. Would you expect some adverse impact in terms of advertising spending, especially for a leading portal like --

Charles Chao

Especially where? In auto?

Richard Ji - Morgan Stanley

In terms of the advertising spending, those three sectors.

Charles Chao

Are you talking about these three, like automobile, real estate, and finance sectors?

Richard Ji - Morgan Stanley

Correct. Based on your feedback and based on your conversation with these advertisers and a lot of them are clearly -- they are experiencing some difficulties right now and what do you expect they may slow down their spending, especially in the Olympic period?

Charles Chao

I think that during the Olympic period, some of these advertisers will scale back their spending a little bit if they are not Olympic sponsors or do not desire having to really spend their dollars during this very crowded period. So we do see some kind of scale back during the month of August basically for these sectors.

I think the real estate is less impacted because it is basically -- it’s quite independent in terms of the spending, in terms of -- I mean, when and where they want to spend their marketing dollars. But for these big ticket items like automobiles, some of the [inaudible] companies, if they do not want to be overshadowed by the Olympic related advertising campaigns, they tend to scale back a little bit during the month of August, just to make sure that their spending will be effective for their campaigns in China.

The financial sector is an area that probably you will see some scale back for two reasons -- I think the stock market, as you know, has not performed very well and the trading volume is very low right now, and so that will impact the desire for the spending of a lot of investment funds in China for their online promotions during this period.

And other than that, we do not see too much negative impact from the Olympic Games. The Olympic Games overall is like any major event we experienced before -- people who would have spent money anyway during a particular period, even a very major sports events here. But on the other hand, they spend money more on the Olympic side. They probably will spend less money in other areas, so it’s [all balanced] but on a net net, you will see a more positive net impact on Olympic Games. But if you talk with different sectors, different customers, [this is usually what we deal with].

Richard Ji - Morgan Stanley

Thank you, Charles.

Operator

Your next question comes from Wallace Cheung from Credit Suisse. Please proceed.

Wallace Cheung - Credit Suisse

Two key questions -- first of all, can you quantify the percent of the revenue or the absolute dollars of revenue lost from the Sichuan earthquake in the second quarter?

And the second question will be regarding the third quarter increase in marketing expenses, can you quantify how big will be the increase and what kind of margin dollars are you going to spend, and then the potential decline in marketing dollars in the fourth quarter? Thank you.

Charles Chao

For your first question to answer, I cannot quantify that. Are you talking about the marketing dollars from the earthquake or the marketing dollars negative impact by the earthquake?

Wallace Cheung - Credit Suisse

Yeah, the negative impact by the earthquake regarding the three-day mourning and also potential delay of spending from advertisers. Thank you.

Charles Chao

I think that there is a negative impact from the earthquake, that’s for sure. But I don’t think that’s material in any measure because when we see that we were not really doing any advertising in that three-day morning period and also not that much during the entire period for earthquake for certain pages, like our front page, our news channel, these very prominent inventory locations. And that did have a negative impact but we also see what happened was that a lot of campaigns were actually delayed and not cancelled, so I would say a large percentage of the advertisers delayed their campaign and most of these people spent their money in June, so there was some negative impact. But I don’t think it was material [for the second quarter].

[inaudible] without the earthquake, we probably would have performed a little bit more better in the second quarter but I don’t think it would be that much more.

And for Q3, for the marketing spending, we are going to spend extra dollars in marketing and it’s hard to say what is [inaudible] Olympic Games because we would have spent some dollar amount on the brand advertising for other product advertising anyway. We just kind of pushed the budget more the Olympic Games in the third quarter.

If I -- I won’t give you range here. Probably we’re going to spend $2 million to $3 million incremental marketing dollars because of the Olympic Games in this particular quarter and that figure overall will come down in Q4, basically.

Wallace Cheung - Credit Suisse

Just a quick follow-up regarding my first question on the Sichuan impact, do you see -- have you seen any delay of the spending towards the first quarter?

Charles Chao

Towards the first quarter?

Wallace Cheung - Credit Suisse

No, I mean to the quarter of July to September, third quarter.

Charles Chao

Third quarter -- no, we did not see any delayed campaigns that were supposed to be carried out in Q2 that are going to be carried out in Q3. I’m not aware of these kind of campaigns.

Wallace Cheung - Credit Suisse

Okay. Thank you very much.

Operator

Your next question comes from Eddie Leung with Merrill Lynch. Please proceed.

Eddie Leung - Merrill Lynch

Can you give us more color on the new advertisers [starting up] in the past quarter? Which industries were you talking about and do we see any traction outside of the big three industries?

Charles Chao

Yes, I think on an order basis, we did have a good increase of our advertisers based in Q2 and the total advertisers I think reached over 600. It was 17% more than -- 18% more than the same quarter of last year. And the new customers are actually coming from different sectors, like FMCG, like Internet services, especially the e-commerce players, and also to a less extent from the real estate customers as we expand our reach to a national market for real estate advertising, basically.

So we see new customers from different sectors outside these three major sectors we talked about. I think the major growth is probably come from FMCG, like Internet service, and possibly telecommunications, including all these telecom companies like China Mobile, China Telecom, these types of companies, basically.

Eddie Leung - Merrill Lynch

Okay. Thank you.

Operator

Your next question comes from Ming Zhao of SIG. Please proceed.

C. Ming Zhao - Susquehanna Financial Group

Two quick questions -- one is today, do you have any visibility about the fourth quarter? For example, the top line growth, you guys did very, very well I think in the first three quarters on average, mid-50s. So for 4Q, should we be looking at -- you know, continue to be mid-50 or low-50 or 40s? Just a rough idea, not wanting any guidance for that.

Charles Chao

That’s very close, Ming. I will talk very briefly here and I think overall, we have -- I think our growth, we have a good feeling about the growth of Olympic Games in Q4, given our -- through our channels and our customers and also especially the big customers in our major industries, major sectors. We still have a good feeling about fourth quarter but I really cannot quantify the number or even give you a range about what type of growth rate we will have in Q4, because typically, as you know, that we probably will have a much better feeling in the [third quarter] when we actually ramp up our backlog. But it’s now still a little early for us to have a very [confident] base to say exactly what kind of growth range will be for the fourth quarter, but my feeling is that, or our estimate is that definitely Q4, compared to Q3, Q4 will be slightly down, so Q4 will be in a total dollar amount between Q2 and Q3 numbers, but how much it will be down will be depending on -- I think the major factor probably is the economy and other, if there is anything happening in any major industry, but that is something that’s beyond our control.

But on an overall basis, our feeling is that Q4 is going to be slightly down from Q3 and it’s going to be a number between Q2 and Q3’s number.

C. Ming Zhao - Susquehanna Financial Group

Okay, just one follow-up on the -- in the 2Q’s cost and expense related to Olympics, although the Olympics haven’t started in the second quarter, so is there any way we can know roughly how many you have spent on the Olympic related events or marketing activities in the second quarter?

Charles Chao

We actually do not really calculate exactly what is our Olympic related revenues for Q2. As explained before, this is really hard to do because some of these Olympic sponsors, some of these are not Olympic sponsors but they are really doing some sort of campaign related to the games or the theme of the games in China. So it’s really difficult to quantify or classify what exactly or who exactly is a customer for the Olympic Games or not.

But overall, I think Q2 really heated up a little bit from Q1’s level because of the beginning of the torch relay in China, and so we do have some extra dollars from the torch relay campaign from the Olympic sponsors. And also, some of the other non-Olympic sponsors are also spending more money in Q2 to really use this opportunity to promote their brand -- at sort of [ambush marketing] in China.

So basically I think it’s an overall mixed picture but to -- as I said before, the Olympics is an important factor for growth in ’08 especially in Q3 and to a lesser extent in Q2. But I think that the revenue impact for the Olympic Games really happens in Q3. Q2, if there was anything, it’s still going to be non-material and I don’t think it will impact the overall trend too much in the future.

C. Ming Zhao - Susquehanna Financial Group

Great. That’s very helpful. Thank you very much.

Operator

Your next question comes from [Paul Wei] from Lehman Brothers.

Paul Wei - Lehman Brothers

Just several quick questions for you -- on these top three categories that you mentioned, finance, real estate, and auto, what percentage of revenues did that actually represent of your advertising dollar in the second quarter?

Charles Chao

On an overall basis, there is about 58% from the sectors. I think automobile is a little bit over half of this amount and the other two combined, a little bit less than 50% of that amount.

Paul Wei - Lehman Brothers

Okay. Just during the quarter, right? Is that pretty consistent over time or is it --

Charles Chao

I think it’s pretty consistent. I think automobile is a little bit higher this quarter because there is a major auto show in China in April and the annual major auto show in China which attracts a lot of advertisers, basically.

Paul Wei - Lehman Brothers

And also, could you quantify the amount of content related costs related to the Olympic for the second and third quarter? How much do you expect to spend in dollars for the Olympic content related costs?

Charles Chao

For Q2, there was not really very much that was directly related to the Olympic Games, because with the Olympic Games related content are the ones really directly relate to the event itself in terms of the news, the photos, the videos, these type of things, not really related to other marketing related content. In Q2, there was only one exception probably with the content, video content related to the torch relay, which was not that significant in Q2.

In Q3, just given the range here, I would say that it’s going to be probably around $8 million to $9 million as our additional content costs.

Paul Wei - Lehman Brothers

$8 million to $9 million additional content costs related to the Olympics?

Charles Chao

Yes.

Paul Wei - Lehman Brothers

Okay, and then -- what’s that? And then you had mentioned --

Charles Chao

Go ahead.

Paul Wei - Lehman Brothers

The final question is on your -- you had mentioned that large companies represent a large percentage of your ad revenue. Could you give me an idea of what percentage of your ad revenues come from large companies versus SMEs?

Charles Chao

We actually -- I mean, in terms of brand advertising, most of our revenues are coming from big brand companies. I wouldn’t say big, big brand companies but the brand companies, not from SMEs. SME revenues are actually very small in terms of a percentage of total advertising revenue.

Paul Wei - Lehman Brothers

Would you say it’s under 10% from SMEs?

Charles Chao

It really depends on how you define SMEs here. I mean, I would say 10% is probably like -- yeah, it’s a safe range.

Paul Wei - Lehman Brothers

And then finally, I didn’t hear very clearly -- did you say the number of total advertisers you have during the second quarter is about 300? Is that correct or --

Charles Chao

No, it’s more than 600.

Paul Wei - Lehman Brothers

Six-hundred advertisers?

Charles Chao

More than 600. It’s almost 700 -- 694.

Paul Wei - Lehman Brothers

Okay. Thank you very much.

Operator

Your next question comes from Vivian Li from Piper Jaffray. Please proceed.

Vivian Li - Piper Jaffray

I just have a follow-up to Ming’s question -- post-Olympics --

Charles Chao

Hello?

Cathy Peng

Operator, can you get Vivian back?

Vivian Li - Piper Jaffray

Madam, your line is open -- are you with us?

Cathy Peng

I think Vivian just dropped. Can you get her back to the call?

Operator

Yes, Madam. I will try. One moment. Madam, her line is open. At the time, she is still here with us.

Cathy Peng

But we can’t hear her somehow.

Operator

Miss Li, if you would be so kind to queue back up. If you would press star, one, so I could put you back into the queue. Okay, Madam, her line just dropped off.

Cathy Peng

Let’s take the next one.

Operator

Your next question comes from Dick Wei of J.P. Morgan. Please proceed.

Dick Wei - J.P. Morgan

Charles, earlier you talked about more on a top down approach regarding the longer term advertising growth in China in the economic slowdown period upcoming, potentially. If you can talk a bit from the bottoms-up approach, maybe go by different, the top three verticals. For example, I guess real estate, I don’t know where you see the growth coming from. Currently, maybe kind of a majority of your real estate related advertising is from the Beijing or around the Beijing area. What about the potential rest of the country? I think in terms of financials, any -- I mean, obviously you expect less from the securities firms and more to the insurance companies, for example?

And then I guess on the automobile sector, I guess traditional has already -- has a more online allocation already. Where do you see the additional allocations to come from? And then I have a follow-up question as well. Thanks.

Charles Chao

That’s going to be a very long question, Dick. I will try my best. For different sectors, I would say that each sector may perform a little bit differently. But the one thing is the industry trend in terms of the total advertising dollar by a particular sector, and the other is their allocation of online. And for the sectors you talked about, the automobile is a very large sector and we have been growing very nicely in this particular area in the last couple of years. In fact, we are probably now one of the largest advertising media for automobiles in China right now.

The overall automobile industry, I mean, I’m not an expert in this particular area but from the trend we have seen, from the bookings we have right now in Q3 and to a certain extent in Q4, we are not really seeing much negative trend in this particular area, although people have been talking about whether there is a slowing down in automobile sales in China, but I would say that although the growth rate for total sales for automobile might be coming down in China, but because the base has become so large and also that because there’s so many different models in China. I mean, if you came to China, you probably know that there are so many different models for automobiles here and people keep introducing new models to this particular market. So the need for a campaign for automobiles remains very strong in this market, and also online has proven to be very, very effective for automobile advertising for their marketing campaigns.

So I think this particular sector is still going to do well. The second one is the housing market, real estate. In general, it’s a very bad market for real estate right now in China, with a very strong decline in terms of trading volume for sales and buying in the housing market but on the advertising side, we see more people begin to adopt online for housing advertising.

As you know, probably not before a few years ago that all of the marketing budgets had been allocated to newspapers, the print media for the housing industry, and now the trend is moving more to the online. And you also mentioned that our revenues from Beijing versus other areas, that’s also correct, that online national market base is that the major cities have been early adopters of Internet media for their advertising for the housing and now we are seeing more second and third tier cities that people begin to adopt Internet for their marketing purposes.

So because we did this new company for the vertical in the real estate area, we were able to expand our reach to the national market on a pretty rapid pace and so as you know, last year we probably generated 90% of our revenues from real estate in the Beijing market alone, and now this number will probably jump to 70%.

So on an overall basis, the housing market may be not very good but on the other and, the need for marketing still exists because there are a lot of developers probably will have to sell their -- a lot of developing projects in order to generate cash flow here. And also, as I said, that will be more marketing dollar and they can do it online in the real estate market.

And for financial services, I mean, overall it’s a very strong market. Growth for advertising in the last couple of years, not just online but also offline. But we do see a slowdown in the growth rate in this particular market in China, in advertising market for the particular sector.

For online, as you saw, last quarter we did about 139% increase year over year, and this quarter we did over probably 91% year over year growth for financial services. So you see, the growth rate for financial services can be down but overall I think it is still going to be a sector that will generate quite healthy growth in the future because in the early period, you probably saw [an immediate] impact on the stock market where you see a lot of investment funds put money in different media properties for advertising and now we are seeing more of these kind of big banks, insurance companies, and also coming to online for advertising purpose. And so there will be a mixed picture here with shift of the client base in this particular sector. But overall I think the growth rate for this particular sector will come down a little bit and with mixed results from different customers in this particular sector.

And I think it will take a lot of time if I continue talking about each sector here. Maybe we can exchange about this particular topic offline, Dick, what do you think?

Operator

Your next question comes from Leah Hao. Please proceed.

Leah Hao - Analyst

I don’t mean to keep on pounding on this point but just in terms of the non-GAAP operating margins, in Q2 despite increasing content costs as well as marketing spending, you still managed to generate year-on-year growth. Should we be expecting somewhat of a flattish year-on-year for Q3 instead? Or any color there would be very helpful.

And also along that line, what is your expectation for Q4? And the next question, if I may, you mentioned news [to your strategy] as well as product. Just wondering if there is any progress that -- any color along that line would be very helpful as well. Thank you.

Charles Chao

I’m sorry, I did not quite get the second question -- what products?

Leah Hao - Analyst

Sure, the second question, you mentioned in the prepared remarks that SINA has been continuing focusing on improving the sales strategy, as well as on coming out with attractive new products for the longer term growth, so I was just wondering if there’s any specific trends that we can takeaway with, that would be great. Thank you.

Charles Chao

Okay. So the first question regarding operating margin, I think we can see an increase from last year but I think it’s a natural trend, given our high growth in the revenue area. We should see the leverage of our operating model here. I think it’s in Q2, not only with -- we’ve incurred some content costs in Q2 for -- like a special sports event like the Euro Cup and also we take a little bit more marketing campaigns than we usually typically do here, because of the period leading up to the Olympic Games, we did quite a few campaigns related to our sports, SINA sports and also for our brand purpose, just because it’s a good period for us to spend more marketing dollars.

So I think without this extra spending, we probably will see a little bit even more operating leverage in Q2. But in Q3, as I mentioned, we probably will see a lot more content costs -- although they are non-recurring but that’s a larger amount, as I mentioned earlier. And also we are going to spend extra marketing dollars in Q3 also related to the Olympic Games, so overall operating margin I think will be coming down, as I said maybe impact by the extra spending, so we do not expect Q3 operating margin will be the same or stay at the same level as the same quarter last year. It will probably come down a little bit.

And for the new product areas, we have talked about these new products and the new initiatives in our previous quarters. Our focus really in two areas -- first, of course, we are continuing building our different products for our online media properties in terms of providing a better service for users. The other one is that more importantly, we have been very focused on building up our web 2.0 products and also in the bigger areas, we see in the video advertising and the community related web 2.0 advertising will be due to trend and we will have to invest a lot more here to [inaudible] and to reach the critical mass for advertising, and we do believe that this represents the future of our growth and so we will have more to report to you guys probably in the next quarter.

Leah Hao - Analyst

Thanks a lot.

Operator

Your next question comes from Elinor Leung. Please proceed.

Elinor Leung - CLSA

Actually, I have two questions -- you mentioned you would have extra marketing dollars in the third quarter. Can you quantify that? Which means that extra marketing dollar which will not be recurring in 2009?

And my second question is regarding the mobile value-added service. I continue to see healthy growth in the industry. Does it mean that the regulatory environment or operating environment has improved? Should we continue to see growth in 2009? And what has been the major driver for the WVAS growth in the second quarter? Thank you.

Charles Chao

For the first question, I said early on that the extra marketing dollars was probably in the range of $2 million to $3 million for the third quarter. That is going to be incremental in Q3 that probably will not be recurring in the future because it is directly related to Olympic Games.

And regarding your question on the MVAS, you are right. I think the fact that we have been able to revamp our service and revenue in this particular business has a lot to do with the more stabilized operating policy environment in China, especially with China Mobile here. As I explained to people early on in the previous conference call that the current operating policy actually is more favorable to big players. The players tend to have more -- a better product, better service and tend to follow the rule more closely -- in other words, tend to have better treatment from China mobile because they have a ranking system and the better performer will get a better score and the inventory, I mean, they will get better treatment from China mobile in a lot of areas.

So I think that this environment has continued to improve, that I think our current business, as I said earlier on, in this particular area became more stabilized. And in the future, if you are talking about the potential beyond 2008, like in ’09 or 2010, I would say that the current business, I think it will have -- the current service will [inaudible] in terms of growth but that we more [rely on] building this business in terms of product lines and also our channels and so on and so forth, so we can take advantage of the future opportunities and then when 3G becomes implemented in China -- I think that the problem with 3G -- either the pace has accelerated, at least in the, because of the restructuring of the telecom industry in China.

And so I think it’s going to happen probably some time next year that we will see more 3G users and in that case, we will probably be able to, given our strength in this area and the customer base we have built upon, we will be in a better position to take advantage of this new opportunity.

And so overall, I think the picture on the MVAS is becoming better, compared to the point we had last year, basically.

Operator

Ladies and gentlemen, at this time I would now like to turn the call back over to Ms. Cathy Peng, Investor Relations Manager. Please proceed.

Cathy Peng

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

Operator

Ladies and gentlemen, at this time you may now disconnect. Good day.

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Source: SINA Q2 2008 Earnings Call Transcript
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