Earnings Preview

| About: Inc. (SOHU)

A leading online brand and Internet portal in China, Inc. (SOHU) is set to release its third quarter 2010 results on October 25, 2010, before the U.S. market opens.

During the second quarter earnings call, Sohu provided guidance for the third quarter 2010. For the third quarter, management expects total revenue in the range of $153.0 million to $158.0 million.The Zacks Consensus Estimate for total revenue is $157.0 million, in line with management’s expectation.

Sohu projects advertising revenues to be in the range of $61.0 million to $63.0 million. The company expects the growth in revenues to come from World Cup, Shanghai Expo and Asian Games as well asfrom online video growth.

Brand advertising revenues are estimated to be in the range of $57.0 million to $59.0 million, implying an 8% to 11% sequential growth and 16% to 20% year-over-year growth. Online game revenues are expected to be in the range of $80.0 million to $83.0 million.

Sohu projects net income on a non-GAAP basis after deducting the non-controlling interest in Changyou to be in the range of $39.0 million to $41.0 million and earnings in the range of $1.00 to $1.05.

The Zacks Consensus Estimate for earnings per share is 90 cents for the third quarter and $3.53 for full year 2010.

Second Quarter Highlights
Second quarter earnings, including stock-based compensation expense increased 3.8% year over year to 82 cents per share, beating the Zacks Consensus Estimate of 80 cents by 2 cents. Earnings excluded Sohu’s non-controlling interest in the online gaming company Changyou.

Total revenue was up 15.0% year over year and 13.0% sequentially to $146.1 million in the second quarter of 2010, and was well above the Zacks Consensus Estimate of $143.0 million. This increase was primarily driven by a strong growth in brand advertising and online gaming revenues, which fully offset the weakness in wireless revenues.

We are encouraged by the company’s growing cash balance as well as its debt free balance sheet. At the end of second quarter 2010, Sohu had $599.1 million in cash and cash equivalents.

Our Take
Sohu is expected to benefit from its strength in online games and China’s growing online advertising industry. The company expects increased advertising spending in 2010 with the World Cup, World Expo and Asian games. Moreover, online video growth, which is expected to triple from the last year, will drive sales.

Although results improved, the company’s operating expenses have been steadily going up, which we apprehend could limit the earnings growth. Moreover, recent delays in game launch (Duke of Mount Deer) and intense competition could further pressure performance.

Analysts’ estimates for the third quarter and full year 2010 increased, in the last 30 days. Overall, 1 of the 15 analysts covering the stock has raised the estimate for the third quarter while 2 have made an upward revision to their estimates for full year 2010. There were no downward revisions.

Third quarter EPS estimate rose by 1 cent while full year 2010 EPS estimate was up by 4 cents. Given the positive revision to the estimates, the stock is currently a Zacks #2 Rank, a short-term Buy rating.

We expect the company to meet the Zacks Consensus Estimate for 2010 but advise investors to wait for a more favorable entry point. We believe Sohu is a 2011 growth story. We therefore maintain our Neutral rating on the stock over the long term.