Sohu.com Inc. (
reported non-GAAP EPS of 66 cents in the fourth quarter of 2012,
which decreased 47.8% year over year and 14.1% sequentially due
to higher expenses and margin contractions. EPS including
stock-based compensation came at 60 cents, which comfortably
surpassed the Zacks Consensus Estimate by 7 cents.
Total revenue jumped 21.7% year over year and 4.9%
sequentially to $299.5 million, ahead of management's guided
range of $288.0-$293.0 million. Revenues also surpassed the Zacks
Consensus Estimate of $293.0 million. The increase was primarily
driven by strong search business and online gaming revenues.
Total online advertising revenue increased 19.9% year over
year and 6.7% sequentially to $120.8 million. This strong growth
in advertising revenues was driven by 68.4% year-over-year growth
in Search and Others revenue, which reached $38.7 million. Search
revenues increased 9.7% on a sequential basis.
The strong year-over-year growth in search was primarily
attributable to higher contribution from pay-per-click services.
Online marketing services on the Sogou Web Directory also
contributed significantly, driven by higher traffic and improved
monetization. In the last quarter, Sogou revenues jumped 78% year
over year and 10% quarter over quarter to $41.0 million.
Brand advertising revenue grew 5.6% from the year-ago quarter
to $82.1 million and was in line with the higher end of
management's guided range of $80.0 million to $82.1 million.
Revenues increased 5.4% sequentially. Brand advertising continued
to benefit from strong performance of the auto, online video and
real estate sectors.
Total number of clients grew 18% sequentially as the company's
coverage expanded to include non-FMCG clients in the reported
quarter. Brand advertising revenue growth also benefited from
higher marketing spending among non-Japanese auto makers, which
fully offset cautious spending from Japanese car makers in the
Sohu video continued to maintain its dominating position,
driven by content portfolio that includes American television
drama series, domestic variety shows and in-house developed
programs. Video views for American television channel jumped
136.0% sequentially in the fourth quarter.
Online games (operated by Changyou.com) revenue surged 29.0%
year over year and 5.2% sequentially to $158.9 million, well
ahead of management's expectation of $152.0 million-$155.0
million. Online gaming revenues grew on the back of expanding
user base and improved monetization.
Aggregate registered accounts for Changyou's games jumped
41.0% from the year-ago quarter and 11.0% sequentially to 248.1
million. Average revenue per user (ARPU) soared 60.0% year
over year and 11.0% sequentially to RMB353, driven by higher
spending from Tian Long Ba Bu's ("TLBB") advanced level players
in the reported quarter.
Wireless revenues decreased 12.6% year over year and 11.7%
quarter over quarter to $12.6 million, due to new operator
policies to reduce consumer complaints. Others revenue decreased
7.4% year over year but increased 5.1% sequentially to $7.2
million in the reported quarter.
Gross margin contracted 220 basis points ("bps") from the
year-ago quarter to 68.8%. The year-over-year contraction was
primarily due to significant decline in online advertising gross
margin, which was 52.4% compared with 59.1% in the year-ago
quarter. On a sequential basis gross margin expanded 270 bps.
Operating expenses as a percentage of revenues was 47.3%
compared with 40.1% in the year-ago quarter. On a sequential
basis, operating expenses as a percentage of revenue surged 350
bps in the quarter.
The sharp rise in operating expense was primarily due to
higher product development cost, which jumped 51.5% year over
year and 11.6% from the previous quarter to $52.4 million. Sales
& marketing expenses surged 49.9% from the year-ago quarter
and increased 18.2% sequentially to $68.8 million.
The higher-than-expected increase in operating costs had a
negative impact on the quarterly profits. Operating margin
declined to 21.5% from 30.9% in the year-ago quarter. Operating
margin declined 80 bps sequentially.
Net margin declined to 8.5% from 19.9% reported in the
year-ago quarter. Net margin contracted 190 bps on a sequential
Balance Sheet & Cash Flow
Sohu exited the fourth quarter with cash and cash equivalents
of $833.5 million compared with $773.5 million in the previous
quarter. Long-term debt was $126.4 million at the end of the
For the first quarter of 2013, Sohu expects total revenue in
the range of $290.0-$299.0 million. Sohu estimates brand
advertising revenues in the range of $78.0 million to $80.0
million, up 28% to 31% year over year. However, revenues are
estimated to decline in the range of 2.0% to 5.0%
Sogou revenues are expected to be in the range of $34.0 to
$36.0 million, representing 50% to 59% year-over-year growth.
However, revenues are estimated to decline in the range of 12.0%
to 17.0% sequentially.
Online game revenues are expected in the $160.0-$165.0 million
range, representing 26% to 29% year-over-year growth. Revenues
are forecasted to increase in the range of 1.0% to 4.0%
Non-GAAP net income is expected in the range of $19.0 million
to $21 million and EPS is projected between 50 cents and 55 cents
Although Sohu did not provide any guidance for the full year,
the company expects strong growth from video, Sogou and online
games due to innovative product portfolio. Sohu expects to
release four expansion packs for TLBB in 2013. Sohu also plans to
launch at least 3 new massively multiplayer games and a number of
new web games.
We believe that Sohu's results will continue to be negatively
impacted by increasing product development costs in the near
term. Sohu is a relatively small player in the online advertising
market and continuing investments in product development are
necessary to expand market share.
However, we believe that market share gain will be difficult
in the near term. Sohu faces stiff competition from
in search and advertising,
Youku Tudou (
in online video and
in online gaming markets.
Moreover, Sohu's first-quarter guidance reflects sluggish
top-line growth on a sequential basis, which further compels us
to remain on the sidelines.
Currently, Sohu has a Zacks Rank #4 (Sell).
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