Sohu.com Inc. (
reported earnings of 56 cents per share in the second quarter of
2013, which decreased 26.8% year over year and 11.4% on a
sequential basis. Earnings including stock-based
compensation comfortably surpassed the Zacks Consensus Estimate
by 6 cents.
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Revenues jumped 18.8% year over year and 10.2% sequentially to
$338.9 million, slightly ahead of the mid-point of the management
guided range of $333.0-$342.0 million. Revenues also surpassed
the Zacks Consensus Estimate of $337.0 million.
The year-over-year increase was primarily driven by strong
performance from the online advertising and online gaming
Online advertising revenues surged 29.3% year over year and 25.9%
sequentially to $116.3 million. The year-over-year growth was
primarily driven by strong performance from online video, Sogou,
search and brand advertising.
Sohu video continued to maintain its dominant position, driven by
a content portfolio that includes American television drama
series, Japanese animation series, domestic variety shows and
During the quarter, Sohu Video started streaming The Voice of
China (Jul 12), which attracted significant traffic. The superior
content portfolio helped video advertising sales to grow
double-digit on a sequential basis.
Sohu achieved significant growth in the mobile video segment as
traffic increased massively in the second quarter. Mobile average
daily active users and video views jumped 60% and 70.0%,
respectively on a sequential basis.
Sogou revenues continued to grow in the quarter, up 64.0% year
over year and 27.0% quarter over quarter to $50.0 million. This
was higher than management's guided range of $34.0 to $36.0
The Sogou pinyin mobile version added 60.0% more users since the
beginning of 2013. At the end of the second quarter, monthly
Sogou mobile pinyin's monthly active user base stood at 115
million. Search and Others revenues jumped 30.9% from the
year-ago quarter and 28.1% sequentially to $46.2 million.
Brand advertising revenues grew 28.7% from the year-ago quarter
to $100.2 million and were slightly ahead of the higher end of
management's guided range of $90.0 million to $100.0 million.
Revenues increased 24.9% sequentially, within management's guided
range of 22.0% to 25.0% growth. Brand advertising continued to
benefit from strong traffic driven by an improving online video
Online games (operated by Changyou.com) revenues surged 11.4%
year over year but inched up 0.5% sequentially to $168.3 million,
toward the higherend of management's expectation of $165.0
million-$170.0 million. Online gaming revenues grew on the back
of expanding user base and improved monetization from Tian Long
Ba Bu's ("TLBB") and recently launched Dou Po Cang Qiong.
Wireless revenues increased 7.0% year over year and 11.2% quarter
over quarter to $15.3 million. Others revenue surged 31.1% year
over year but declined 11.7% sequentially to $8.9 million in the
Gross margin expanded 550 basis points ("bps") from the year-ago
quarter to 66.5%. The year-over-year expansion was primarily due
to significant increase in online advertising gross margin, which
was 48.0% compared with 31.5% in the year-ago quarter. On a
sequential basis, gross margin increased 20 bps.
Operating expenses, as a percentage of revenues, were 47.5%
compared with 43.0% in the year-ago quarter. On a sequential
basis, operating expenses as a percentage of revenues improved
420 bps in the quarter.
The sharp year-over-year rise in operating expenses was primarily
due to higher sales & marketing as well as product
development expenses, which as a percentage of revenues jumped
190 bps and 180 bps, respectively. General & administrative
expenses increased 80 bps from the year-ago quarter.
On a sequential basis, product development and sales &
marketing expenses jumped 200 bps and 190 bps, respectively.
General & administrative expenses increased 30 bps from the
The sharp increase in operating expenses fully offset a higher
gross margin base. Operating margin expanded a modest 100 bps
from the year-ago quarter but contracted a massive 410 bps from
the previous quarter.
Net margin declined to 6.4% from 6.7% reported in the year-ago
quarter and contracted 150 bps on a sequential basis.
Balance Sheet & Cash Flow
Sohu exited the second quarter with cash and cash equivalents of
$770.5 million compared with $798.3 million in the previous
quarter. Long-term debt was $159.0 million compared with $157.5
million at the end of the previous quarter.
For the third quarter of 2013, Sohu expects total revenue in the
range of $358.0 million-$370.0 million. Sohu estimates brand
advertising revenues in the range of $120.0 million to $125.0
million, representing 54% to 61% year-over-year growth and 20.0%
to 25.0% sequential growth.
Although Sohu has started selling mobile ads on video for
iPad, the company does not expect significant revenue generation
in 2013. However, this initiative is expected to meaningfully
contribute to revenues in 2014. The Voice of China is expected to
contribute 80.0% of the increase of advertising revenues for the
third quarter. Sohu expects online video to breakeven in 2015.
Sogou revenues are expected to be in the range of $54.0 to $56.0
million, representing 45% to 50% year-over-year growth and 8.0%
to 12.0% sequential growth. Online game revenues are expected in
the $161.0 million-$166.0 million range.
Non-GAAP net income is expected in the range of $19.0 million to
$21 million and earnings are projected between 50 cents and 55
cents per share.
We believe that Sohu's innovative product pipeline, and strong
traffic growth from the search, online video and mobile business
will drive top-line growth going forward. Moreover, strong growth
potential exists in the online gaming business, which may further
catapult the stock in the near term.
However, Sohu is a relatively small player in the online
advertising market and continuing investments in product
development are necessary to expand market share. This will keep
margins under pressure in the near term.
Despite higher spending, we believe that market share gain will
be difficult in the near term due to stiff competition from the
Qihoo 360 Technology (
in most of its operating markets.
Currently, Sohu has a Zacks Rank #4 (Sell).