Sohu.com (SOHU) Q2 Loss Narrows, Misses Revenue Estimates - Analyst Blog

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Sohu.com Inc. ( SOHU ) reported loss of $1.16 per share in the second quarter of 2014, which was narrower than the Zacks Consensus Estimate of a loss of $1.29 per share. However, Sohu had reported earnings of 56 cents per share in the year-ago quarter.

The second quarter loss can be attributed to a massive surge in operating expenses related to compensation and promotional activities.

Revenues

Revenues jumped 18.1% year over year to $400.2 million, which however missed the Zacks Consensus Estimate of $405.0 million. The year-over-year increase was primarily driven by strong performance from online advertising, brand advertising and search & other segments, which more than offset the decline in revenues in the Online Games segment.

Total online advertising revenues, which include revenues from brand advertising and search and others businesses, were $218.5 million, up 49.3% year over year.

Brand advertising revenues in the reported quarter totaled $85.1.0 million, up 84.2% year over year. The year-over-year increase was mainly due to growth in online video and real estate advertising businesses.

Search and others revenues were $133.4 million, up 33.2% year over year. The year-over-year increase was mainly due to increased traffic and improved monetization as well as due to the effect of synergies from the Soso business acquired in the third quarter of 2013.

Online game revenues for the second quarter of 2014 were $153.9 million, down 8.6% year-over-year. The year-over-year decline was primarily due to decreased revenues from Wartune and DDTank in China.

Sogou's second quarter revenues reached $91.0 million, representing a decent 82.0% year-on-year growth, which topped the prior guidance. During the quarter, Sogou launched the unique Wechat official account search function as it deepened its cooperation with Tencent.

Changyou's platform initiatives appeared to be well on track with the second quarter achieving 252 million average monthly active users of platforms channels. Of these, approximately 50 million users were sourced from mobile apps.

During the quarter, the company introduced the top-ranked talk show called The Conan Show which received positive response.

The company's games pipeline for the rest of 2014 includes three MMO games, two web games and five to six mobile games.

Margins

Gross margin contracted 900 basis points (bps) from the year-ago quarter to 57.5%. Operating expenses jumped 81.6% year over year to $292.1 million. Operating expenses, as a percentage of revenues, were 73.0% compared with 47.5% in the year-ago quarter.

The year-over-year increase in operating expenses was mainly due to an increase in salaries and compensation expenses as a result of increased headcount and higher marketing and promotional expenses.

The sharp increase in operating expenses hurt operating margins. Operating loss was $61.8 million in the reported quarter compared to a profit of $64.4 million in the year-ago quarter.

Net loss attributable to Sohu was $50.5 million or $1.16 per share compared to net profit of $53.2 million or 56 cents per share reported in the year-ago quarter.

Balance Sheet & Cash Flow

Sohu exited the second quarter with cash and cash equivalents of $1.05 billion compared with $1.14 billion in the previous quarter. In the second quarter, Sohu generated $5.0 million in operating cash flow compared to cash outflow of $35.0 million in the prior quarter. Of these, approximately $3.0 million was generated by Changyou alone.

Outlook

For the third quarter of 2014, Sohu expects revenues in the range of $427.0 million-$442.0 million. Management estimates brand advertising revenues in the range of $148.0 million to $153.0 million, representing 19.0% to 23.0% year-over-year growth.

Sogou revenues are expected to be in the range of $100.0 to $105.0 million, representing 76.0% to 84.0% year-over-year growth. Online game revenues are expected in the $158.0 million-$163.0 million range.

Non-GAAP net loss is expected in the range of $29.0 million to $33.0 million while loss per share is projected between 75 cents and 85 cents per share. The Zacks Consensus Estimate stands at a loss of $1.38 per share.

Management expects to continue launching new expansion packs to expand the longevity of its existing games.

Our Take

We believe that strong traffic growth in the search, online video and mobile businesses will drive top-line growth, going forward. Moreover, strong growth potential exists in the online gaming business. Additionally, the partnership with Tencent will boost Sogou's traffic, which will further drive Sohu's top line going forward.

Further, with continued organic growth and the support of Tencent's vast online properties, Sogou's market share in PC and mobile search is expected to further expand over time. However, we believe that there is still substantial room for Sogou to improve its search monetization capability.

However, Sohu is a relatively small player in the online advertising market and continuing investments in product development are necessary to expand its market share. This will keep margins under pressure in the near term but strengthen the long-term competitiveness of the company in China.

Despite higher spending, we believe that market share gain will be difficult in the near term due to stiff competition from the likes of Baidu, Inc. ( BIDU ), Akamai Technologies ( AKAM ), AOL Inc ( AOL ) and such others in most of its operating markets.

Currently, Sohu has a Zacks Rank #3 (Hold).


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: SOHU , BIDU , AKAM , AOL

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