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Why Is Sohu.com (SOHU) Down 12.9% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Sohu.com (SOHU). Shares have lost about 12.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Sohu.com due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Sohu.com Q3 Earnings Beat Estimates, Revenues Up Y/Y

Sohu.com reported third-quarter 2019 non-GAAP loss of 55 cents per share, much narrower than the Zacks Consensus Estimate of a loss of $1.23 and year-ago quarter’s loss of 60 cents.

Revenues were up 8.6% year over year to $482.3 million. On a constant-currency basis, revenues grew 12% year over year.

The year-over-year growth in both top and bottom lines was driven by improved performance of the company’s online game and search businesses, and cost-saving initiatives in Sohu Media and Sohu Video segments.

Top-Line Details

Total online advertising revenues increased 7.2% year over year to $334.5 million.

Brand advertising revenues in the reported quarter fell 18.7% on a year-over-year basis to $46.3 million.
 
Search and search-related revenues improved 13% year over year to $288.2 million. Online game revenues of $108 million grew 12.5% from the year-ago quarter.

Meanwhile, other revenues declined 10.6% year over year to $39.8 million.

Media Portal and Video revenues were $25 million and $22 million, respectively.

Sogou’s revenues increased 14% year over year to $350 million.

Sogou’s search and mobile keyboard integrated with AI technology witnessed healthy growth. Sogou Mobile Keyboard daily active users (DAUs) reached 464 million, up 14% year over year. Notably, Sogou maintained its position as the “second-largest search engine” based in China. Meanwhile, Sogou Mobile Keyboard continues to be the “third largest Chinese mobile app” on expanding user base.

Changyou’s revenues improved 9% year over year to $111 million. Apart from solid performance by TLBB PC and the Legacy TLBB mobile titles, TLBB Honor — a new mobile game launched during the quarter — performed well during the quarter.

Margins

Non-GAAP gross margin in the quarter expanded 160 bps on a year-over-year basis to 47.9%.

Online advertising non-GAAP gross margin rose 490 bps on a year-over-year basis to 37.1%.

Brand advertising business margin expanded 830 bps on a year-over-year basis to 30.9%. Moreover, non-GAAP gross margin of the search and search-related business in the reported quarter grew 380 bps to 38.1%. However, online games non-GAAP gross margin contracted 70 bps to 17.6%.

Non-GAAP operating expenses were $215 million, down 10.5% year over year.

Sohu’s non-GAAP operating income was $16 million. The company reported an operating loss of $34.6 million in the year-ago quarter.

Balance Sheet

As of Sep 30, 2019, Sohu’s cash and cash equivalents (and short-term investments) came in at $1.563 billion compared with $1.698 billion as of Jun 30.

Fourth-Quarter Guidance

Sohu expects total revenues between $435 million and $470 million.

Brand Advertising revenues are anticipated in the range of $40-$45 million, indicating a year-over-year decrease of 21-30%.

Online game revenues are expected in the band of $95-$105 million, suggesting a year-over-year decline of 1-12%.

Sogou revenues are projected to be $290-$310 million, implying a year-over-year increase of 3-4%.

Non-GAAP net loss is expected between 30 cents and 55 cents per ADS.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 65.5% due to these changes.

VGM Scores

Currently, Sohu.com has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise Sohu.com has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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