) 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
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
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
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
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
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.
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
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
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.
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
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. (
), Akamai Technologies (
), AOL Inc (
) and such others in most of its operating markets.
Currently, Sohu has a Zacks Rank #3 (Hold).
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report
SOHU.COM INC (SOHU): Free Stock Analysis Report
BAIDU INC (BIDU): Free Stock Analysis Report
AKAMAI TECH (AKAM): Free Stock Analysis Report
AOL INC (AOL): Free Stock Analysis Report
To read this article on Zacks.com click here.