Sohu Beats, Outlook Disappoints - Analyst Blog

Sohu.com Inc.'s (SOHU) net income in the quarter fell year over year and quarter over quarter due to poor operating performance as operating expenses rose in the quarter. On a non-GAAP basis, net income was $39.3 million or 92 cents per share in the quarter, down from $59.0 million or $1.50 per share last year and $40.9 million or 96 cents per share last quarter. However, fourth-quarter earnings beat the Zacks Consensus estimate of 90 cents per share by 2 cents and were in line with the company’s guidance.
 
Over the last 30 days, one of the 13 analysts covering the stock lowered estimates for the current quarter. With respect to earnings surprises, the stock has fluctuated substantially over the last four quarters, with three positive surprises and one negative surprise. However, the average remained positive at 6.8%. This implies that Sohu has beaten the Zacks Consensus Estimate by 6.8% over the last four quarters.
 
Operating Performance
 
Gross margin on a non-GAAP basis was 75% in the fourth quarter of 2009, compared with 76% in the third quarter of 2009 and 75% in the fourth quarter of 2008. Margins were impacted by lower gross margin in brand advertising, which was 65% in the quarter compared with 69% in the last quarter and 67% in the year-ago quarter. Online game gross margin also declined in the quarter to 92% from 93% in both the last quarter and the year-ago period.
 
Operating expenses in the quarter increased 14.0% year over year primarily due to continued investment in product development and increased sales and marketing expenses. Sequentially, expenses were down by 4%. As a result, operating margin on a non-GAAP basis increased 100 basis points sequentially to 42% but remained constant on a year-over-year basis.
 
Revenue
 
Revenue for the quarter was $135.8 million, up 11.7% from $121.6 million in the year-ago period but down sequentially by 0.6%. Revenue was in line with the company’s guidance of $134.5- $138.5 million.
 
The year-over year increase in revenue was mainly driven by a 21.1% year-over-year increase in online game revenue to $70.7 million, while the sequential decline was due to a fall in total advertising revenue by 3.9% to $48.8 million in the quarter.
 
By segment, brand advertising revenue fell 5% sequentially due to the global financial crisis and weak advertising spending but increased 2% year-over-year to $48.5 million in the quarter. Both the online game revenue and brand advertising revenue were in line with the company’s guidance.
 
Online game revenues increased 3% sequentially and 21.1% year-over-year, primarily due to the increased popularity of Changyou's (CYOU) flagship game, TLBB. Moreover, overseas licensing revenues increased 15% sequentially and 5% year over year to $2.1 million due to increased momentum of TLBB in international countries such as Vietnam and Malaysia.
 
The increase in online gaming revenue was due to the higher active paying accounts (APA) and user base expansion, which reflects the growing popularity of Changyou's online games. Aggregate registered accounts for Changyou's games increased 8% sequentially and 41% year over year to 80.9 million, while APA was flat quarter-over-quarter and increased 21% year over year to 2.4 million. Average revenue per user (ARPU) also increased 3% quarter-over-quarter and 1% year over year. Aggregate peak concurrent users (PCU) for Changyou’s games were approximately 990,000, an increase of 19% year over year and 9% sequentially.
 
Balance Sheet
 
We are encouraged by the company’s cash balance of $563.8 million at the end of the quarter as well as its debt free balance sheet. During the quarter, Sohu repurchased 751,224 shares at an average price of $53.26 each, for a total consideration of $40.0 million.
 
Outlook Disappoints
 
For the first quarter of 2010, Sohu expects total revenue in the range of $123 million to $128 million, with advertising revenues within the $40 – $42 million range. Brand advertising revenue is expected to be within $38 – $40 million and Online game revenues to be in the range of $70 – $73 million.
 
Revenue is much below expectation due to delay in game launches and dismal advertising spending, which is yet to recover. Moreover, Sohu competes against NetEase.com (NTES), Tencent Holdings and Shanda Games (GAME).
 
The company expects its net income on a non-GAAP basis after deducting the share pertaining to the Non-Controlling Interest in Changyou to be in the $31 million or 78 cents to $33 million or 83 cents per share range in the first quarter. This is much below the Zacks Consensus Estimate of 97 cents.
Read the full analyst report on "SOHU"
Read the full analyst report on "CYOU"
Read the full analyst report on "NTES"
Read the full analyst report on "GAME"
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