Sohu.com Q1 Fiscal Year 2015 Results

| About: Sohu.com Inc. (SOHU)

Sohu.com (NASDAQ:SOHU) released Q1 FY2015 results which included both revenue and earnings per share topping consensus estimates (revenue $455 million USD vs. $439 est., -0.81 USD EPS vs. -1.22 USD est.). The company's revenue was driven higher by strong performance from its Sogou and Changyou.com subsidiaries. Revenues from Sogou grew +66% YoY, with further progress in search a main factor (PC search performed well, and the company made progress monetizing on mobile, which contributed over 20% of revenues). Changyou.com reported strong performance in its core Internet games segment, which drove overall results.

Although Sohu's did report a loss for the quarter, positive performance in Sogou was a clear takeaway. The company has been investing in building up its video content library, which has been a drag on overall results, but seeing Sogou revenue growth continue at strong double digits, along with a healthy operating margin, is encouraging.

Management's Q2 outlook was softer than expected in terms of revenue ($475 million vs. $482 million USD average), but earnings were inline (non-GAAP loss per share between -0.90 and -1.15 USD vs. an expected -1.03 loss per share).

Recent Quarterly Performance FY2014 FY2015
(000) USD Q1 Q2 Q3 Q4 Q1
Revenue 365,315 400,151 430,401 477,196 455,332
Gross profit 226,817 230,265 248,741 281,606 233,178
Operating profit -68,613 -61,805 -40,702 -33,857 2,695
Net income -56,042 -50,533 -31,912 -32,746 -4,599
Earnings per share (non-GAAP, diluted) -1.26 -0.88 -0.61 -0.36 -0.66
Comparison YoY
Revenue 19% 18% 17% 24% 25%
Gross profit 11% 2% 2% 14% 3%
Operating profit n.a. n.a. n.a. n.a. n.a.
Net income n.a. n.a. n.a. n.a. n.a.
Earnings per share n.a. n.a. n.a. n.a. n.a.
Comparison QoQ
Revenue -5% 10% 8% 11% -5%
Gross profit -9% 2% 8% 13% -17%
Operating profit n.a. n.a. n.a. n.a. n.a.
Net income n.a. n.a. n.a. n.a. n.a.
Earnings per share n.a. n.a. n.a. n.a. n.a.
Margin analysis
GPM 62% 58% 58% 59% 51%
OPM -19% -15% -9% -7% 1%
NPM -15% -13% -7% -7% -1%

Sohu's first quarter balance sheet included highly liquid assets (cash and cash equivalents, short-term investments) of about $1.1 billion USD, flat QoQ and slightly lower than the $1.1 billion USD in Q1 FY2014.

Outlook

The company's Q2 FY2015 outlook included the following:

  • Revenue: $460-$490 million USD (brand advertising revenues of $150-$160 million USD, Sogou revenues of $135-$145 million USD, Online game revenues of $155-$165 million USD)
  • Non-GAAP EPS: between -0.90 and -1.15 USD per share on a fully diluted basis

Included in management's Q2 outlook were for further revenue growth from most of its major business units (online games being the exception). Using a midpoint estimate, management expected brand advertising revenues to rise about +16% YoY and QoQ, driven by both Sohu Media Portal (+24% YoY, +13% QoQ) and Sohu Video (nearly double YoY, +20% QoQ). For Sogou, the forecast was for top-line growth of about +54% YoY (+20% QoQ). Changyou.com's online game Q2 outlook included revenue slowing to about $160 million USD (+4% YoY, -14% QoQ).

The change in revenue mix was the main factor in the company's expected quarterly losses. Although Sohu Media achieved a slight profit in Q1, a seasonally slow quarter, it seems safe to assume some margin improvement going forward. But the video business continued to be plagued by relatively high costs both for content and bandwidth. Management identified content costs as a key factor pushing up brand advertising expenses in Q1, explaining that it spent heavily in Q1, a strategy which continued into Q2. On the Q1 call, management shared its expectations for both cost items to be an ongoing challenge, suggesting that as the business continued to grow losses would continue.

Performance of Sogou could help offset some of the margin pressure, however. Partly due to the tie-up with Tencent (OTCPK:TCEHY), which operates QQ and Weixin, dominant mobile messaging applications in China, Sougou has seen its footprint in mobile search expand. The segment has been profitable, and has been delivering significant margin expansion over the past few quarters (from about 4% in Q1 FY2014 to 14% in q1 FY2015).

Financial Performance

Sohu.com Quarterly Income Statement FY2014 FY2015
(000) USD Q1 Q2 Q3 Q4 Q1
Revenues
Online advertising 175,412 218,472 247,246 257,853 238,947
Brand advertising 111,103 133,408 148,823 147,824 133,821
Search and others 64,309 85,064 98,423 110,029 105,126
Online games 163,388 153,877 150,338 184,405 184,994
Others 26,515 27,802 32,817 34,938 31,391
Total revenues 365,315 400,151 430,401 477,196 455,332
YoY 19% 18% 17% 24% 25%
Cost of revenues
Online advertising -95,877 -123,318 -129,799 -122,632 -154,471
Brand advertising -64,140 -82,898 -83,424 -77,246 -104,552
Search and others -31,737 -40,420 -46,375 -45,386 -49,919
Online games -26,586 -30,263 -33,949 -51,754 -49,485
Others -16,035 -16,305 -17,912 -21,204 -18,198
Gross profit 226,817 230,265 248,741 281,606 233,178
YoY 11% 2% 2% 14% 3%
Gross profit margin 62% 58% 58% 59% 51%
Product development -117,722 -102,218 -107,971 -81,374 -102,191
Sales and marketing -142,354 -136,606 -131,742 -115,812 -83,128
General and administrative -35,354 -53,246 -49,730 -65,995 -45,164
Goodwill, intangibles impairment 0 0 0 -52,282 0
Operating profit -68,613 -61,805 -40,702 -33,857 2,695
YoY n.a. n.a. n.a. n.a. n.a.
Operating profit margin -19% -15% -9% -7% 1%
Interest income 8,457 8,779 7,468 6,273 3,154
Foreign currency exchange gain/loss 578 59 -610 -1,169 6,035
Other income/expense, net 3,750 694 896 4,619 -183
Pretax income -55,828 -52,273 -32,948 -24,134 11,701
Tax expense -214 1,740 1,036 -8,612 -16,300
Net income -56,042 -50,533 -31,912 -32,746 -4,599
YoY n.a. n.a. n.a. n.a. n.a.
Net margin -15% -13% -7% -7% -1%
Net income to mezzanine non-controlling interests 0 0 0 0 0
Net income/loss due non-controlling interests 4,935 9,443 4,760 13,171 -26,521
Dividend to non-controlling Sogou series A preferred shareholders -27,747 0 0 0 0
Net income due Sohu shareholders -78,854 -41,090 -27,152 -19,575 -31,120

Disclosure: None.

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