), a leading online brand and Internet portal in China, reported
second quarter results, wherein the earnings per share surpassed
the Zacks Consensus Estimate by a couple of cents and revenue moved
past the Zacks Consensus Estimate of $247.0 million by 3.5%.
Total revenue increased 28.6% year over year to $255.7 million
in the reported quarter and was ahead of management's guided range
of $244.0 million to $250.0 million. The increase was primarily
driven by strong search business and online gaming revenues.
Total online advertising revenue increased 20.6% year over year
to $98.1 million. Brand advertising revenue in the quarter grew
2.4% year over year to $69.3 million and was within management's
guided range of $68.0 million to $71.0 million. Search revenue
soared 111.3% year over year to $28.8 million in the reported
quarter, primarily driven by higher revenues from pay-for-click
services and online marketing services.
Online game revenue increased 35.1% year over year to $137.2
million, comfortably ahead of management's expectation of $130.0
million to $133.0 million. Online game revenue was driven by the
51.0% increase in the Aggregate registered accounts for Changyou's
Lesser number of in-game and virtual items distribution in the
martial arts MMO game TLBB resulted in the 10.0%
year-over-year decrease in the Aggregate active paying accounts
(APA) for Changyou's games. However, the Average revenue per user
(ARPU) increased 31.0% year over year driven by the decline in
low-spending active paying accounts.
Wireless revenue increased 34.0% from the year-ago quarter to
Gross profit on non-GAAP basis increased 7.6% year over year to
$155.8 million. Gross margin on a non-GAAP basis decreased from
73.0% in the year-ago quarter to 61.0% as most of its business
segments suffered margin contractions.
Online advertising gross margin was down from 60.0% in the
year-ago quarter to 31.0% due to the contraction of margins in the
online brand advertising (down from 64.0% in the year-ago quarter
to 26.0%). However, search business gross margin expanded 40
basis points (bps) on a year-over-year basis driven by higher
revenues from online marketing services.
Online games gross margin was 87.0% as compared with 90.0% in
the year-ago quarter.
Operating expenses shot up 49.4% year over year to $112.8
million in the quarter, due to higher product development cost (up
67.8% year over year), sales & marketing expense (up 34.0% year
over year) and general & administrative expense (up 33.6% year
The higher-than-expected increase in operating costs had a
negative impact on the quarterly profits. Non-GAAP operating profit
decreased 32.4% year over year to $49.5 million, while margin
plummeted to 19.0% in the quarter from 37.0% reported in the
Net income on non-GAAP basis was $16.4 million or 42 cents per
share, which was down from $47.4 million or $1.21 per share in the
year ago quarter. Net income including stock-based compensation
came at $10.8 million or 28 cents per share, which was down from
$38.9 million or $1.10 per share.
Sohu exited the second quarter with cash and cash equivalents of
$764.6 million compared with $761.0 million in the previous
quarter. At the end of the quarter, Sohu had no debt on its balance
For the third quarter of 2012, Sohu expects total revenue in the
range of $272.0 million to $277.0 million. Sohu estimates brand
advertising revenue in the range of $76.0 million to $78.0
Online game revenue is expected in the $141.0 million to $144.0
million range, representing a year-over-year growth in the range of
22.0% to 24.0%. Management anticipates Sogou revenue to be $37.0
million for the third quarter, which implies a year-over-year
growth of 101.0%.
Non-GAAP net income, after deducting the non-controlling
interest in Changyou, is expected in the range of $19.0 million to
$21.0 million and earnings are projected between 50 cents and 55
cents per share.
Sohu is expected to benefit from its strength in online games
going forward. We believe that the growing popularity of Changyou's
games will drive profitability over the long term.
However, higher operating costs due to continued investments in
online video business may hurt Sohu's profitability in the near
term. Moreover, cut-throat competition from the likes of
) and slowing Chinese economic environment are the other near-term
Therefore, we maintain a Neutral recommendation on the stock
over the long term. Currently, Sohu has a Zacks #3 Rank, which
implies a short-term Hold rating.
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