After market closed, SINA Corp. (SINA) reported revenues of $96.4 million in the third quarter of 2009. Revenues was down 8.6% year over year but was up 6.8% sequentially. Revenues exceeded the company’s guidance of $91.0 – $94.0 million and easily beat the Zacks Consensus estimate of $94.0 million.

This reflects strong execution of the company’s online advertising business in China , which grew double-digits sequentially. We expect a huge improvement in SINA’s advertising business, as advertising spending recovers.

SINA expects to benefit from government stimulus packages. Moreover, management is witnessing signs of a strong recovery in the advertising market in China in the second half of this year, which is reflected in the company’s higher-than-expected guidance.

Advertising revenues decreased 16.3% year over year but was up 10% quarter over quarter, exceeding the company’s guidance of $60.0 – $62.0 million. Non-advertising revenues increased 11.6% year over year and was marginally up from last quarter. This was better than management’s guidance of $31.0 – $32.0 million.

Gross margin was 59% in the quarter, up from 57% last year and 56% in the preceding quarter. This was due to increasing advertising revenues outpacing the growing cost of advertising revenues, primarily bandwidth-related. This raised advertising gross margin, which in turn, raised overall margins.

Operating margin came in at 22.5% as operating expenses decreased 3% year over year but increased 6% sequentially, mainly due to higher marketing costs.

Net income on a non-GAAP basis was $20.1 million, down 15.4% from last year, but up 17% quarter over quarter. Earnings per share (EPS) of 34 cents beat the Zacks Consensus Estimate of 30 cents, but were down from 39 cents reported in the year-ago period.

Under the $100 million share repurchase program, SINA repurchased approximately 2.5 million shares for $50 million at an average price of $20.37. The company expects to continue repurchasing the remaining $50 million in future quarters, which will add to shareholders wealth.

During the quarter, the company generated $29.1 million of cash from operations, compared to $18.8 million last quarter. The company ended the quarter with cash and equivalents of $599.7 million, an increase of $17.7 million from the previous quarter. As of September 30, 2009, convertible debt remained at $99 million.

In October, SINA completed the merger of its online real estate advertising business with E-House ( China ) Holdings Ltd., subsidiary of China Real Estate Information Corporation (CRIC). SINA has 39% equity interest in CRIC. This merger will help SINA form the largest online and offline real estate information and consulting platform in China .

SINA also entered into a private equity placement of its ordinary shares with New Wave Investment Holding Company Limited, a British Virgin Islands company established and controlled by Charles Chao, SINA’s Chief Executive Officer and other members of the management. SINA will receive gross proceeds of $180 million in exchange for approximately 5.6 million shares. The issuance of shares to New Wave will have a dilutive effect on the company’s outstanding shares in the fourth quarter of 2009.

The company will account for its interest in CRIC from Oct 1, 2009 and expects to recognize a material gain from the closing of the merger transaction with CRIC.

Going forward, management expects revenues of between $93 million and $96 million, excluding advertising revenue from real estate business due to its merger with CRIC. Including the advertising revenue from real estate business, total revenue will range between $106 million and $109 million.

Advertising revenue is expected to be $61 – $63 million and non-advertising revenue to be $32 – $33 million in the fourth quarter. Including the carve out of the real estate business, the forecasted advertising revenues would have been between $74 million and $76 million.

SINA is a leading provider of online media and value-added information services in China . SINA’s online advertising business has continued to do well and has built a competitive edge based on its popularity in China . The company expects strong growth in advertising revenue in 2010 due to resurgence in margins.

We maintain our Neutral rating on the stock.
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