Sohu explains lowered guidance (SOHU 2Q05 conf call)

Includes: BIDU, CHL, CHU, SOHU
by: Ezra Marbach

Here are notes from Sohu (ticker: SOHU) management's Q2 2005 earnings results conference call:

FY 2005 Guidance

  • Sponsored search y-o-y growth of more than 30%.
  • Advertising revenue growth REVISED to 20-25% versus previous guidance of 30% growth.

Explanation for New Guidance

  • Sohu's South China operation and games site have experienced changes in last 2 months.
  • Sohu typically derives substantial ad revenue in Southern China from mobile handset and electronics companies. Currently, there is intense competition in those sectors and price wars are ongoing. Ad spending from these sectors has slowed as many of these companies are struggling. Sohu had previously assumed revenues from these companies in their guidance. This explains a portion of the downward revision.
  • Due to the overwhelming success of The9's (ticker: NCTY) World of Warcraft (WoW), many online game companies are delaying launch of new games -- and thus their ad spend. Sohu is revising guidance to account for the possibility that the ad spend for these new games may not come until next year.

Cautious Recovery in Wireless Business

  • Sohu saw 7% sequential growth in its wireless business.
  • SMS revenue grew 5% sequentially to $3.5 million.
  • WAP revenue grew 2% to $2.1 million -- Sohu had guided for flat growth.
  • IVR revenue grew 27% to $600,000.
  • MMS and RBT revenue still not substantial.

Sponsored Search

  • Generated $3.1 million in revenue –- majority from search.
  • Sohu has not yet effectively monetized
  • 80% of revenue from search derived from paid listings.
  • Search costs increased due to need to increase servers and bandwidth.

On Relationship with China Unicom (ticker: CHU)

  • Unicom taking greater percentage of revenue.
  • Unicom now derives 20% of revenue versus 10% previously.
  • Unicom also charging promotional fee capped at RMB 500,000 per month.
  • No changes expected from China Mobile (ticker: CHL).

On China's Internet Search Wars

  • Over last 6 months Google (ticker: GOOG) has reportedly lost market share.
  • Baidu's share has been flat.

On Re-valuation of China's Currency

  • Revenue will increase due to re-valuation.