Sohu.com (SOHU) Q1 Loss Narrows Y/Y, Revenues Decline

Sohu.com Inc. reported adjusted loss of 53 cents a share in the first quarter of 2016, which narrowed considerably from the prior-year quarter loss of 81 cents per share. However, revenues in the quarter were down 10.4% to $408 million due to lower revenues from online gaming.

Following the release, the company’s shares declined over 3.4% in yesterday’s trading session.

Segment Details

Total online advertising revenues, which include revenues from brand advertising, search and web directory businesses, were $259.3 million, up 9% year over year.

Brand advertising revenues in the reported quarter totaled $125.5 million, down 6.2% year over year owing to sluggishness in online video and 17173 advertising businesses. The company’s revenues from Sohu Media Portal remained flat year over year at $45 million. Sohu Video, however, fell 16% on a year-over-year basis to $41 million.

Search and search-related revenues was $133.8 million, a robust increase of 27.3% on a year-over-year basis owing to growth in mobile traffic.

Online game revenues for the quarter were $103 million, down 45% on a year-over-year basis as a result of lower revenues from older games and a decline in web game revenues due to the divestment of the 7Road business.

Sogou’s revenues were $147 million, representing a significant 27% year-over-year increase driven by higher search related revenues. However, Changyou’s CYOU revenues were $130 million, a decrease of 38% on a year-over-year basis.

Margins

Non-GAAP gross margin in the quarter increased to 53% from 51% in the year-ago quarter. Non-GAAP gross margin of the company’s online advertising business was 43%, up from 35% in the prior-year quarter while brand advertising business margin was 32%, up from 22% reported in the year-ago quarter. Decreasing video costs and changing revenue contribution from mobile games led to the rise in margins.

Non-GAAP gross margin of the company’s online game business was up to 75% from 73% in the prior-year quarter. Non-GAAP operating profit remained flat at $15 million in the quarter.

Balance Sheet

Sohu exited the quarter with cash and cash equivalents (and short-term investments) of $1.44 billion, compared with $1.42 million as of Dec 31, 2015.

Outlook

For the second quarter of 2016, Sohu expects revenues in the range of $420 million–$450 million.

Management estimates brand advertising revenues in the range of $125 million to $135 million, representing 11% to 17% year-over-year decline. The company expects to generate 35% to 38% of total brand advertising revenues from Sohu Media Portal and 36% to 39% from Sohu Video.

Sogou revenues are expected to be in the range of $175 million to $185 million, representing 19% to 25% year-over-year growth. Online game revenues are expected in the $95 million–$105 million range, indicating year-over-year decline of 39% to 45%.

The company expects non-GAAP loss per share to be between $1.30 cents and $1.55 cents. GAAP loss per share is expected to be in the range of $1.45 cents to $1.70 cents.

To Conclude

Sohu is a relatively small player in the online advertising market and continuing investments in product development are necessary to expand its market share. Additionally, the ongoing sluggishness in China and unfavorable currency translation can have some negative impact on the business going ahead.

Nonetheless, Sohu seems well positioned to benefit from strong traffic growth in search, online video and mobile businesses. The company expects strength in Sogou to continue going ahead on the back of increased investment in its search division. On the other hand, the company is redefining its business strategy for Changyou, which would likely be a key long-term driver despite some setbacks in the near term.

Amid all these, stiff competition from the likes of Baidu, Inc. BIDU, NetEase, Inc (NTES) and SINA Corporation (SINA) and such others remains a concern.

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