Sohu.com Inc.
(SOHU) reported non-GAAP EPS of 66 cents
in the fourth quarter of 2012, which decreased 47.8% year over year
and 14.1% sequentially due to higher expenses and margin
contractions. EPS including stock-based compensation came at 60
cents, which comfortably surpassed the Zacks Consensus Estimate by
7 cents.
Revenues
Total revenue jumped 21.7% year
over year and 4.9% sequentially to $299.5 million, ahead of
management’s guided range of $288.0–$293.0 million. Revenues also
surpassed the Zacks Consensus Estimate of $293.0 million. The
increase was primarily driven by strong search business and online
gaming revenues.
Total online advertising revenue
increased 19.9% year over year and 6.7% sequentially to $120.8
million. This strong growth in advertising revenues was driven by
68.4% year-over-year growth in Search and Others revenue, which
reached $38.7 million. Search revenues increased 9.7% on a
sequential basis.
The strong year-over-year growth in
search was primarily attributable to higher contribution from
pay-per-click services. Online marketing services on the Sogou Web
Directory also contributed significantly, driven by higher traffic
and improved monetization. In the last quarter, Sogou revenues
jumped 78% year over year and 10% quarter over quarter to $41.0
million.
Brand advertising revenue grew 5.6%
from the year-ago quarter to $82.1 million and was in line with the
higher end of management’s guided range of $80.0 million to $82.1
million. Revenues increased 5.4% sequentially. Brand advertising
continued to benefit from strong performance of the auto, online
video and real estate sectors.
Total number of clients grew 18%
sequentially as the company’s coverage expanded to include non-FMCG
clients in the reported quarter. Brand advertising revenue growth
also benefited from higher marketing spending among non-Japanese
auto makers, which fully offset cautious spending from Japanese car
makers in the quarter.
Sohu video continued to maintain
its dominating position, driven by content portfolio that includes
American television drama series, domestic variety shows and
in-house developed programs. Video views for American television
channel jumped 136.0% sequentially in the fourth quarter.
Online games (operated by
Changyou.com) revenue surged 29.0% year over year and 5.2%
sequentially to $158.9 million, well ahead of management’s
expectation of $152.0 million-$155.0 million. Online gaming
revenues grew on the back of expanding user base and improved
monetization.
Aggregate registered accounts for
Changyou's games jumped 41.0% from the year-ago quarter and 11.0%
sequentially to 248.1 million. Average revenue per user
(ARPU) soared 60.0% year over year and 11.0% sequentially to
RMB353, driven by higher spending from Tian Long Ba Bu’s (“TLBB”)
advanced level players in the reported quarter.
Wireless revenues decreased 12.6%
year over year and 11.7% quarter over quarter to $12.6 million, due
to new operator policies to reduce consumer complaints. Others
revenue decreased 7.4% year over year but increased 5.1%
sequentially to $7.2 million in the reported quarter.
Margins
Gross margin contracted 220 basis
points (“bps”) from the year-ago quarter to 68.8%. The
year-over-year contraction was primarily due to significant decline
in online advertising gross margin, which was 52.4% compared with
59.1% in the year-ago quarter. On a sequential basis gross margin
expanded 270 bps.
Operating expenses as a percentage
of revenues was 47.3% compared with 40.1% in the year-ago quarter.
On a sequential basis, operating expenses as a percentage of
revenue surged 350 bps in the quarter.
The sharp rise in operating expense
was primarily due to higher product development cost, which jumped
51.5% year over year and 11.6% from the previous quarter to $52.4
million. Sales & marketing expenses surged 49.9% from the
year-ago quarter and increased 18.2% sequentially to $68.8
million.
The higher-than-expected increase
in operating costs had a negative impact on the quarterly profits.
Operating margin declined to 21.5% from 30.9% in the year-ago
quarter. Operating margin declined 80 bps sequentially.
Net margin declined to 8.5% from
19.9% reported in the year-ago quarter. Net margin contracted 190
bps on a sequential basis.
Balance Sheet & Cash
Flow
Sohu exited the fourth quarter with
cash and cash equivalents of $833.5 million compared with $773.5
million in the previous quarter. Long-term debt was $126.4 million
at the end of the quarter.
Outlook
For the first quarter of 2013, Sohu
expects total revenue in the range of $290.0–$299.0 million. Sohu
estimates brand advertising revenues in the range of $78.0 million
to $80.0 million, up 28% to 31% year over year. However, revenues
are estimated to decline in the range of 2.0% to 5.0%
sequentially.
Sogou revenues are expected to be
in the range of $34.0 to $36.0 million, representing 50% to 59%
year-over-year growth. However, revenues are estimated to decline
in the range of 12.0% to 17.0% sequentially.
Online game revenues are expected
in the $160.0–$165.0 million range, representing 26% to 29%
year-over-year growth. Revenues are forecasted to increase in the
range of 1.0% to 4.0% sequentially.
Non-GAAP net income is expected in
the range of $19.0 million to $21 million and EPS is projected
between 50 cents and 55 cents per share.
Although Sohu did not provide any
guidance for the full year, the company expects strong growth from
video, Sogou and online games due to innovative product portfolio.
Sohu expects to release four expansion packs for TLBB in 2013. Sohu
also plans to launch at least 3 new massively multiplayer games and
a number of new web games.
Our Take
We believe that Sohu’s results will
continue to be negatively impacted by increasing product
development costs in the near term. Sohu is a relatively small
player in the online advertising market and continuing investments
in product development are necessary to expand market share.
However, we believe that market
share gain will be difficult in the near term. Sohu faces stiff
competition from Baidu (BIDU) in
search and advertising, Youku Tudou
(YOKU) in online video and
NetEase (NTES) in online gaming
markets.
Moreover, Sohu’s first-quarter
guidance reflects sluggish top-line growth on a sequential basis,
which further compels us to remain on the sidelines.
Currently, Sohu has a Zacks Rank #4
(Sell).
BAIDU INC (BIDU): Free Stock Analysis Report
NETEASE INC (NTES): Free Stock Analysis Report
SOHU.COM INC (SOHU): Free Stock Analysis Report
YOUKU.COM- ADR (YOKU): Free Stock Analysis Report
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