By Perry Wu
SMS had a nice run. It was good while it lasted. We are now witnessing a change in how mobile users in China communicate, and it has less and less to do with SMS (short messaging service). Or maybe we're just seeing a change in how the listed companies in China relate to investors how much money they can truly derive from SMS. Check out the recent earnings reports from Sina.com, Netease.com, and Sohu.com and you'll see the results of all the hogwash I've been warning investors about regarding mobility investments in China over the last few years.
True, SMS is still a great way for individual phone users to communicate on a one-to-one level. But this type of revenue goes straight to the telcos like China Mobile. Value-added mobile service providers like Linktone, Sohu, Netease, China.com, and Sina don't see a single CNY from these wireless transactions. And for things such as SMS games and SMS value-added services like direction-finding services, news updates, and the like, it has always been difficult or impossible to get good numbers from the Chortals (China + Portal = Chortal) about the true viablity of these services.
Netease issued a warning a few weeks ago, saying its earnings would be affected by continuing declines in its SMS business. Now, with the release of both Sina's and Sohu's second quarter numbers, it is all but official. SMS is going into the dustbin of technological history as a money-maker for the Chortals.
Sina issued its second quarter numbers this past week and its quarter seems to have gone pretty well. It said its net revenues were up 89% from the period last year, with increases in both advertising and non-advertising revenues. But in SMS, its revenues actually declined from $23.7 million to $20.0 million.
A day later, Sohu reported that its SMS revenue was down twenty percent in the second quarter compared to the first quarter. The COO of Sohu, Victor Koo, said in a conference call after the earnings release that the company is going through a "transition" in the wireless business, because SMS isn't what it used to be. Sohu is now pinning its hopes on 2.5G wireless services, hoping that 2.5G will pick up the SMS slack.
Sina tries to sugarcoat its performance by releasing pro forma figures that are slightly better than its regular numbers. But "pro forma" is just another way of window-dressing by excluding expenses that can look especially unpleasant. So in its pro forma calculations, Sina has excluded its amortization of intangible assets, stock-based compensation and convertible bond issuance costs. This really seems more trouble for its accountants than its worth. "Tell the truth and then you won't need to remember your lies," should be the mantra.
Some people consider Sina the Yahoo of China. Whether it's appropriate to compare Sina's business to an American company, the Chinese executives running Sina have certainly learned the Yahoo lingo well. When asked during the conference call how the SMS business will perform during the second half of this year, one Sina executive said "there's no clear visibility". This is American business-speak that translates to "we don't know what the !&$% is going on, but we think it'll get worse".
And in the middle of this industry are companies like recently-listed Linktone. Linktone is a total wireless services company that operates on the value-added service level. They don't have the luxury of earning primary revenue like China Mobile and China Unicom do. They pick up secondary revenue from users, and rely on the telcos to pay most of their bills. I wince in pain at the potential slide into oblivion for this company's services and revenue–they'd better diversify fast or look for a buyer.
For the time being, Sina is a relatively safe company to invest in. The cash on its balance sheet of US$243 million is more than enough to pay off all its liabilities of about US$137 million. As long as Sina doesn't do anything really stupid with its cash like make an unnecessary acquisition, or issue more debt, this should continue to be the case for at least the next couple of years.
Nevertheless, for both Sina and Sohu, revenues from wireless services have been a substantial portion of total revenue for the past couple of years, and probably played some part in the meteoric stock price rises of these two companies in 2003, which has since abated somewhat. For Sina, wireless revenues accounted for 41% of total net revenues (US$20 million of US$49 million) and for Sohu, the proportion was also about 41% (US$11.3 of US$27.3 million). So these companies are hoping that things will turn out well as they transition from SMS.
But, hope isn't a policy. It will be at least several months before we can see whether the likes of Sina, Netease and Sohu can replace their SMS revenue streams with something as profitable. Sina, Netease, and Sohu put on a bullish face this quarter, but time will tell whether it's just a face of bull.
About the author:
Perry Wu is a writer and correspondent for ChinaTechNews.com and can be reached here at the site. Perry Wu does not hold any positions, long or short, on any of the Chinese or American company securities mentioned in this article.