SOHU expects Q2 revenue of $397M-$411M and EPS of $1.25-$1.35. The former's $404M midpoint is unfavorable to a $409.1M consensus, and the latter is well below a -$0.62 consensus. Subsidiary Changyou (CYOU) expects Q2 revenue of $182M-$188M and EPS of -$0.26 to -$0.38, below a consensus of $191.4M and $0.08. The companies also offered light guidance three months ago.
Pressuring Sohu's Q1 EPS: Opex rose 17% Q/Q and 122% Y/Y to $295M, thanks largely to Changyou's marketing/promotional spend and new employee incentive plans. Like peers, Changyou is spending aggressively to hold its ground in a fiercely competitive Chinese gaming market.
Also taking a toll: Sohu's gross margin fell 200 bps Q/Q and 400 bps Y/Y to 62%, due in part to higher amortization costs for licensed video content.
Brand ad sales rose 38% Y/Y in Q1 to $111M, after growing 50% in Q4. Thanks in part to the acquisition of Tencent's Soso search unit, search revenue rose 78% to $64M; mobile search traffic rose 24% Q/Q, and PC traffic "edged up."
Online game revenue (via Changyou) fell 2% Y/Y to $163M, after growing 9% in Q4. Changyou's gaming average monthly accounts totaled 28M, +12% Q/Q but -26% Y/Y due to declines for TLBB, Wartune, and DDTank. Changyou's platform channel accounts (video site, browser, etc.) rose 60% Q/Q and 182% Y/Y to 239M.