) reported earnings of 60 cents per share in the first quarter of
2013, which increased 13.7% year over year but remained flat on a
sequential basis. Earnings including stock-based compensation
comfortably surpassed the Zacks Consensus Estimate by 4 cents.
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Revenues jumped 35.7% year over year and 2.7% sequentially to
$307.6 million, ahead of management's guided range of
$290.0-$299.0 million. Revenues also surpassed the Zacks
Consensus Estimate of $290.0 million. The increase was primarily
driven by strong performance from the online advertising and
online gaming business.
Online advertising revenues surged 40.8% year over year but
decreased 3.7% 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 dominating position, driven
by a content portfolio that includes American television drama
series, Japanese animation series, domestic variety shows and
in-house programs. During the quarter, Sohu Video started
House of Cards
shortly after its US release. The introduction of the show
attracted significant traffic mostly from metropolitan cities
such as Beijing and Shanghai. As a result, video advertising
sales grew double-digit on a sequential basis.
Sohu achieved significant growth in the mobile video segment as
traffic increased massively in the first quarter. Mobile average
daily active users and video views both jumped 40% sequentially
and accounted for 30.0% of total video traffic. During the
quarter, Sohu entered into partnerships with the likes of Samsung
Sogou revenues continued to grew in the quarter, up 73.0% on a
year-over-year basis to $39.0 million. This was much better than
management's guided range of $34.0 to $36.0 million. Although
revenues fell sequentially, the 4.0% decline was much better than
the management's forecasted 12.0% to 17.0% sequential decline in
Sogou pinyin added 11 million new users from the previous quarter
and its penetration rate reached 88.0% at the end of the first
quarter. Sogou mobile pinyin's monthly active user base jumped
34.0% from the end of December last year. As a result, Search and
Others revenues jumped 66.6% from the year-ago quarter to $36.1
million. Search revenues decreased 6.9% on a sequential basis.
Brand advertising revenues grew 31.6% from the year-ago quarter
to $80.2 million and were slightly ahead of the lower end of
management's guided range of $80.0 million to $82.1 million.
Revenues decreased 2.2% sequentially, within management's
guided range of 2.0% to 5.0% decline. Brand advertising continued
to benefit from strong demand from FMCG and real estate.
Online games (operated by Changyou.com) revenues surged 32.9%
year over year and 5.3% sequentially to $167.4 million, well
ahead of management's expectation of $160.0 million-$165.0
million. Online gaming revenues grew on the back of expanding
user base and improved monetization.
Aggregate registered accounts for Changyou's games jumped 45.0%
from the year-ago quarter and 10.0% sequentially to 272.7
million. Average revenue per user (ARPU) soared 77.0% year
over year and 13.0% sequentially to RMB399, driven by higher
spending from Tian Long Ba Bu's ("TLBB") advanced level players
in the reported quarter.
Wireless revenues increased 3.2% year over year and 9.0% quarter
over quarter to $13.8 million. Others revenue surged 116.1% year
over year and 41.2% sequentially to $10.1 million in the reported
Gross margin expanded 140 basis points ("bps") from the year-ago
quarter to 66.3%. The year-over-year expansion was primarily due
to significant increase in online advertising gross margin, which
was 43.5% compared with 39.4% in the year-ago quarter. On a
sequential basis, gross margin contracted 250 bps.
Operating expenses, as a percentage of revenues, were 43.3%
compared with 41.9% in the year-ago quarter. On a sequential
basis, operating expenses as a percentage of revenues improved
400 bps in the quarter.
The sharp year-over-year rise in operating expense was primarily
due to higher sales & marketing expenses, which as a
percentage of revenues jumped 200 bps to 19.1% in the reported
quarter. This fully offset a 20 bps improvement in product
development and 60 bps improvement in general &
On a sequential basis, both product development and sales &
marketing expenses improved 70 bps and 390 bps, respectively.
This fully offset a 50 bps increase in general &
The modest increase in operating expenses and higher gross margin
base drove operating margin to 23.1%, up 10 bps from the year-ago
quarter and 180 bps from the previous quarter. Net margin
declined to 7.5% from 8.9% reported in the year-ago quarter. Net
margin contracted 20 bps on a sequential basis.
Balance Sheet & Cash Flow
Sohu exited the first quarter with cash and cash equivalents of
$798.3 million compared with $833.5 million in the previous
quarter. Long-term debt was $157.5 million compared with $126.4
million at the end of the previous quarter.
For the second quarter of 2013, Sohu expects total revenue in the
range of $333.0-$342.0 million. Sohu estimates brand advertising
revenues in the range of $98.0 million to $100.0 million,
representing 41% to 44% year-over-year growth and 22.0% to 25.0%
Sogou revenues are expected to be in the range of $48.0 to $50.0
million, representing 58% to 65% year-over-year growth and 22.0%
to 27.0% sequential growth. Online game revenues are expected in
the $165.0-$170.0 million.
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 (as a result
of continuing investment on product development), 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. Moreover, competition
from the likes of
) will remain a major headwind going forward.
Currently, Sohu has a Zacks Rank #3 (Hold).