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Sohu.com's (SOHU) Q3 Loss Widens Y/Y but Revenues Improve

Sohu.com Inc. SOHU reported results for third-quarter 2017. While the top line recorded a significant year-over-year improvement, bottom-line comparisons were not favorable.

The company reported non-GAAP loss of $2.38 per share, which was wider than the year-ago quarter’s loss of $1.68. The Zacks Consensus Estimate was pegged at a loss of $1.24 per share.

Sohu’s revenues of $516.1 million were up 25.7% year over year and 12% on a sequential basis.

The robust growth was mainly driven by solid performance of the Legacy TLBB mobile game, which it launched in mid-May, along with continued growth momentum in mobile search. Sohu Media Portal and Sohu Video also showed positive trends.

Notably, the stock has gained 72.1% in the year-to-date period, significantly outperforming the 29.5% rally of the industry it belongs to.

 

Quarter Details

Total online advertising revenues (inclusive of revenues from brand advertising, search and search related businesses) increased 15% year over year to $300 million.

Brand advertising revenues in the reported quarter fell 33% to $75 million on a year-over-year basis mainly due to decreasing demand from large advertisers and real estate advertising.

Search and search-related revenues increased 50% year over year to $225 million on 24% growth in search traffic. Notably, mobile search traffic grew 38% during the quarter.

Online game revenues of $132 million were up 34% from the year-ago quarter mainly on strong performance of the Legacy TLBB mobile game.

Sogou’s revenues grew 55% year over year and 22% from the previous quarter to $257 million, driven by increase in mobile and search traffic.

Sohu Video revenues increased 25% from the year ago quarter to $44 million. The growing popularity of the company’s series Monster Killer helped in adding more subscribers to the platform in the third quarter.

Margins

Non-GAAP gross margin in the quarter increased to 49% from 46% in the year-ago quarter.

Non-GAAP gross margin of the company’s online advertising business was 36%, up from 32% in the prior-year quarter.

Brand advertising business margin was negative 1%, reflecting a sharp drop from 8% reported in the year-ago quarter primarily due to weak video ad sales.

Non-GAAP gross margin of the search and search-related business in the quarter was 49%, in-line with the year-ago quarter.

Non-GAAP gross margin of the company’s online game business was 87% compared with 76% reported in the prior-year quarter, driven by growth in Legacy TLBB game.

Sohu’s non-GAAP operating loss was $75 million compared with a loss of $38 million in the year-ago quarter.

Balance Sheet

Sohu exited the quarter with cash and cash equivalents (and short-term investments) of $1.28 billion compared with $1.24 billion as of Jun 30, 2017.

Outlook

Since Sohu.com’s subsidiary Sogou recently commenced its Initial Public Offering (IPO) process by filing regulatory F-1 form with the Securities and Exchange Commission (SEC), the company did not provide any guidance for Sogou or the entire Sohu group.

For the fourth quarter of 2017, Sohu expects revenues for subsidiary Changyou.com Limited CYOU in the range of $145–$155 million. Online game revenues are expected in the band of $110-$120 million.

The company expects Chagyou’s non-GAAP income per ADS in the range of 66 to 76 cents.

Sohu.com Inc. Price, Consensus and EPS Surprise

Sohu.com Inc. Price, Consensus and EPS Surprise | Sohu.com Inc. Quote

Our Take

The Legacy TLBB game has brought some respite for the company’s online gaming business by gaining positive response since its launch. The game is likely to drive the company’s top line over the next few quarters.

Moreover, Sogou continues to gain popularity and market share through increased product quality and effective marketing campaigns. The company’s investment in research related to artificial intelligence technology will further enhance its product portfolio.

Furthermore, its partnership with Tencent will likely improve Sogou’s competitive position against market leader Baidu BIDU. Notably, in the third quarter, Tencent began the process of testing Sogou Search’s integration into Weixin.

Sohu’s effort to expand its reach in the online video market is a positive. The company has a new drama series Your Highness in its pipeline. It is expected to release in the fourth quarter.

We believe the company’s focus on improving the features of Sohu News APP will help it gain more users. The launch of a new and updated version of News APP in November is a step in that direction.

However, lower spending levels in China, which is affecting the company’s brand advertising revenues and intensifying competition, pose concerns.

Zacks Rank & A Key Pick

Sohu.com carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A better-ranked stock in the broader technology sector isActivision Blizzard Inc ATVI, sporting a Zacks Rank #1.

Long-term earnings growth rate for Activision is projected to be 13.6%.

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Changyou.com Limited (CYOU): Free Stock Analysis Report
 
Sohu.com Inc. (SOHU): Free Stock Analysis Report
 
Baidu, Inc. (BIDU): Free Stock Analysis Report
 
Activision Blizzard, Inc (ATVI): Free Stock Analysis Report
 
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