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Sohu.com Shows Signs of Bottoming Out

Rick Munarriz, The Motley Fool

Sohu.com (NASDAQ: SOHU) is finally starting to reward its shareholders on earnings day. The Chinese online advertising, search, and gaming specialist saw its shares move 7% higher on Monday after posting its third-quarter results. It's a welcome break from six months ago when Sohu hit a 10-year low after a rough first quarter, following that up three months later with an 11-year low after another disappointing financial showing. 

Sohu's report was far from perfect. Just one of its three segments posted any kind of growth, and it wasn't enough to spare Sohu from putting out a double-digit percentage decline in revenue. Sohu is posting a year-over-year decline in revenue for the first time in more than a year, and that's obviously not a good look. However, Sohu had already braced investors for a rough quarter. The negativity was largely discounted, and the out-of-favor Chinese internet pioneer is finding redemption in relative but not absolute victory.

Sohu's bounce on Monday wasn't alone. Spun-off subsidiaries Sogou (NYSE: SOGO) and Changyou.com (NASDAQ: CYOU) -- representing the lion's share of Sohu's search and gaming subsidiaries, respectively -- also inched higher on Monday, but Sohu was the biggest gainer.

Sohu.com logo.

Image source: Sohu.com.

Making things count

Revenue is clocking in at $459.8 million for the third quarter, 11% below where it was a year earlier. This was also a sequential decline. Sometimes there is seasonality even to an online business, but that's not the case here. This is only the second time in more than a decade that Sohu has posted a decline in revenue between the second and third quarters, according to data provided by S&P Global Market Intelligence

Sohu's flagship brand advertising revenue declined 24% to hit $57 million. Its Sogou-fueled search revenue rose 13% to $255 million, the lone gainer in the report. Finally we have the Changyou-propelled online gaming arm contributing $96 million in revenue, a 28% plunge over the past year. Search now accounts for 55% of the total revenue mix here, but the 13% gain there was no match for the 24% and 28% slides in Sohu's two other businesses. 

As bad as the report may seem, investors were waiting. Sohu's guidance back in early August was calling for $445 million to $470 million in revenue, and it landed just above the midpoint of that range. Losses continue at Sohu, but the $0.89-a-share reported deficit and the $0.81-a-share adjusted shortfall was a lot kinder than the $1.40-to-$1.65-per-share loss that it was targeting this summer. 

Guidance isn't awful -- relatively speaking -- for a change. Sohu sees $465 million to $495 million in revenue for the fourth quarter, a sequential increase but a slight year-over-year decline. Sohu sees a modest 5% to 11% increase in search-related revenue, more than pushed down by a 16% to 23% slide in brand advertising and a 13% to 22% drop in its online gaming business. It's also once again modeling a big adjusted loss of $1.15 to $1.40 per share. Sohu may not be on the cusp of turning things around, but things aren't getting worse. And that's a relative victory.  

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Rick Munarriz owns shares of Sogou Inc. The Motley Fool recommends Sohu.com. The Motley Fool has a disclosure policy.