Sina.com's (SINA) financial results for the third quarter ended September 30, 2005 show the company's net income for the quarter decreased 37% $9.1 million, due primarily to an increase in advertising expenses.
The company incurred significantly higher advertising expenses than prior periods on television and radio to acquire subscribers for its subscription-based SMS products. Total direct advertising expenses relating to subscription based SMS products amounted to $6.7 million and accounted for 43% of the sales and marketing expenses for the quarter.
Sina is in the process of considering whether these advertising expenses qualify to be treated as capitalizable direct response advertising under the Statement of Position 93-7 – "Reporting on Advertising Costs" ("SOP 93-7") issued by American Institute of Certified Public Accountants ("AICPA"). If the criteria specified for capitalizing the direct response advertising in this accounting pronouncement are met, then the company should capitalize such advertising expenses and amortize them over the expected benefit periods.
Net revenues for the quarter were $49.6 million, a decrease of 5% from $52.5 million reported in the same period
of 2004 and an increase of 8% from $46.1 million reported in the previous quarter, within the range of the company's guidance between $49.0 million and $52.0 million.
Advertising revenues totaled $23.0 million for the quarter, within the company's guidance between $22.5 million and $23.5 million. This represents a 24% increase from $18.5 million reported in the same period in 2004 and a 13% increase from $20.4 million reported in the previous quarter. The sequential increase in advertising revenues was mainly due to the increased number of advertisers. Total number of advertisers reached 571 in the third quarter as compared to 515 in the second quarter.
Non-advertising revenues totaled $26.7 million for the quarter, within the company's guidance between $26.5 million and $28.5 million. This represents a 22% decrease from $34.0 million reported in the same period in 2004 and a 3% increase from $25.8 million reported in the previous quarter. Total revenues from mobile value-added services ("MVAS") were $24.1 million, representing a decrease of 23% from $31.3 million reported in the same period in 2004 and an increase of 7% from $22.6 million reported in the previous quarter.
Sina saw its third quarter SMS revenues grow 11% sequentially to $17.4 million, primarily due to an increase in revenue from subscription-based SMS products promoted via television and radio commercials. Multimedia messaging service ("MMS") revenues decreased 37% sequentially to $1.3 million, primarily resulting from the impact of the transition to a new billing platform by China Mobile, which began late in the first quarter of 2005. Other
2.5G products, interactive voice response ("IVR"), ring back tone ("RBT") and other new services together grew 9% sequentially to $5.4 million in the third quarter of 2005.
Gross margin for the third quarter was 68%, down from 69% reported in the previous quarter and the same as that reported in the third quarter of last year. Gross margin for advertising revenues was approximately 68% for the quarter, which is the same as the previous quarter. Gross margin for non advertising revenues for the quarter was 67%, down from 70% in the previous quarter.
Operating expenses for the third quarter totaled $24.4 million, an increase of 30% from $18.8 million reported in same period of 2004 and an increase of 20% from $20.4 million reported in the previous quarter. Quarter-over-quarter increase in operating expenses was primarily driven by higher marketing spending on MVAS.
Net income for the third quarter was $9.1 million, representing a decrease of 37% from a net income of $14.5 million for the same period in 2004 and a decrease of 9% from a net income of $10.0 million for the previous quarter.
As of September 30, 2005, Sina's cash, cash equivalents and investments in marketable securities totaled $288.6 million, an increase of $4.5 million from three months ago. Cash flow from operating activities for this quarter was $12.2 million, compared to $8.1 million for the previous quarter and $10.8 million for the same period in 2004.