What Planned Sohu Spinoff Says About Games, and China

Includes: PWRD, SOHU
by: TraderMark

Another quality quarter from Sohu.com (NASDAQ:SOHU) and an interesting ploy to extract value from the market by a proposed IPO of its gaming unit Changyou.com. As in the recent past [Apr 28: Sohu.com Crushes Estimates - Up 15%], the advertising arm did well but the gaming arm did stupendous. This should bode very well for our pure play Chinese gaming stock Perfect World (NASDAQ:PWRD). I cut back the position recently ahead of earnings as I normally do ... the stock is up 4-5% in pre market, despite crushing earnings estimates. Frankly it's a bit disappointing to see such a lack of response, but not surprising anymore. We'll see if it can hold for the next week or if the market will steal away all its gains, despite lack of exposure to subprime, oil, or the U.S consumer.

I should also note that last we noticed China passed the United States in terms of internet users. Penetration rates are only 19% in China versus 71% in the US... have I mentioned demographics are destiny?

  • Sohu.com Inc., a popular Chinese Web portal, said Monday its quarterly profit rose 600 percent over the same period last year on strong advertising and online games revenue ahead of August's Beijing Olympics.
  • Sohu, the official Web portal for the games, also announced plans for an initial public stock offering for its online games unit, Changyou.com.
  • Sohu's quarterly profit rose nearly seven-fold to $40.2 million, or $1.02 a share, from $5.7 million, or 15 cents a share, a year earlier. Excluding share-based compensation expenses, it earned $1.07 in the latest second quarter. It said revenue rose 162 percent from the year-earlier period to $102 million, exceeding its highest forecasts.
  • Analysts on average expected Sohu to post earnings of 70 cents a share, before special items but including stock-based compensation, on revenue of $97.2 million, according to Reuters Estimates.
  • "We expect that penetration of the Internet in China will be escalated to an even higher level with the Beijing 2008 Olympic Games and that, combined with our technological advancements and portal strength, will help us to continue our success for the remainder of 2008 and beyond," co-President and Chief Marketing Officer Belinda Wang said in a statement.
  • Quarterly advertising revenue rose 53 percent over the year-earlier period to $41.7 million, while games revenue rose more than 11 times to $47.9 million, the company said.
  • Sohu said it will submit plans to U.S. securities regulators for an IPO by its games unit, Changyou.com. Sohu said that would let the parent company focus on its other businesses while Changyou focuses on games. Sohu said it would remain Changyou's majority shareholder.
  • China's population of Internet users has risen to 253 million people, surpassing the United States to become the world's biggest, the official China Internet Network Information Center reported last week. Nielsen Online, a research firm, estimated the U.S. online population at 223.1 million Internet users in June.

Guidance well ahead of earnings estimates:

  • For the third quarter, the company forecast profit of $1 to $1.05 a share, excluding the share-based compensation expense, which is expected to reduce Sohu's reported profit by 6 cents to 7 cents a share.

Full earnings report here; conference call transcript.

Disclosure: Long Sohu.com, Perfect World in fund; no personal position