) reported non-GAAP earnings of 77 cents, which was down 38.9%
year-over-year due to higher expenses and margin contractions.
Earnings including stock based compensation came at 67 cents,
comfortably surpassing the Zacks Consensus Estimate of 42 cents.
Total revenue increased 22.5% year over year to $285.4 million
in the reported quarter and was ahead of management's guided
range of $272.0 million-$277.0 million. Reported revenue also
surpassed the Zacks Consensus Estimate of $276 million. The
increase was primarily driven by strong search business and
online gaming revenues.
Total online advertising revenue increased 19.3% year over
year to $113.2 million. Brand advertising revenue in the quarter
grew 1.7% year over year to $77.9 million and was at the higher
end of management's guided range of $76.0 million to $78.0
million. Search and others revenue soared 91.8% year over year to
$35.3 million in the reported quarter, primarily driven by better
monetization opportunities due to increase in traffic.
Online game (operated primarily by Changyou.com) revenue
increased 30.5% year over year to $151.1 million, comfortably
ahead of management's expectation of $141.0 million-$144.0
million. Wireless revenue increased 0.7% year over year to $14.3
Gross profit on non-GAAP basis increased 14.1% year over year
to $188.9 million. Gross margin on a non-GAAP basis decreased
from 71.1% in the year-ago quarter to 66.2% primarily due to
margin contraction in all of its business segments.
Operating expenses increased 36.1% year over year to $124.9
million in the quarter, due to higher product development cost
(up 62.3% year over year), sales & marketing expense (up
23.5% year over year) and general & administrative expense
(up 25.5% year over year). Moreover, operating expenses as a
percentage of revenue increased from 39.4% in the year-ago
quarter to 43.8%.
The higher-than-expected increase in operating costs had a
negative impact on the quarterly profits. Non-GAAP operating
profit decreased 13.2% year over year to $67.6 million, while
margin was down from 33.4% in the previous-year quarter to
Net income on non-GAAP basis was $29.5 million or 77 cents per
share, which was down from $49.0 million or $1.26 per share in
the year-ago quarter.
Sohu exited the third quarter with cash and cash equivalents
of $773.5 million compared with $764.6 million in the previous
quarter. At the end of the quarter, Sohu had no debt on its
For the fourth quarter of 2012, Sohu expects total revenue in
the range of $288 million-$293 million. Sohu estimates brand
advertising revenue in the range of $80 million to $82 million.
Online game revenue is expected in the $152 million-$155 million
range, representing a 23% to 26% year-over-year growth.
Non-GAAP net income is expected in the range of $23 million to
$25 million and earnings are projected between 60 cents and 65
cents per share.
Sohu already boasts a robust product pipeline and is slated
for more releases going forward. Sohu, in association
Electronic Arts Inc.
), will release Battlefield Online in November. The company will
also release another web based game, Qu Shen, in December.
Moreover, Sohu plans to release at least 4 massively multiplayer
online (MMO) games along with several web based games for
Although Sohu reported a better-than-expected third quarter,
we believe that Sohu's continuing investments in product
development (online gaming, video) will keep margins under
pressure going forward.
However, increasing investments are also expected to expand
Sohu's product portfolio over the long term. Sohu's
intention to offer expansion packs for its subscription-based
games on a regular basis is also expected to boost its customer
base going forward.
Thus, we have a Neutral recommendation on Sohu over the long
Sohu's strong product pipeline is expected to boost its top
line in the near term. Currently, Sohu has a Zacks #2 Rank, which
implies a short-term Buy rating.
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