Sohu.com Inc. (SOHU) reported a loss of 74 cents per share in the third quarter of 2014, which was narrower than the Zacks Consensus Estimate of a loss of $1.21 per share. However, Sohu had reported earnings of 45 cents per share in the year-ago quarter.
The third quarter loss can be attributed to a surge in operating expenses related to compensation and promotional activities.
Revenues
Revenues jumped 16.9% year over year to $430.4 million but missed the Zacks Consensus Estimate of $442 million. The year-over-year increase was primarily driven by strong performance from online advertising, brand advertising and search & other segments, which more than offset the decline in revenues in the Online Games segment.
Total online advertising revenues, which include revenues from brand advertising and search and others businesses, were $247.3 million, up 39.6% year over year.
Brand advertising revenues in the reported quarter totaled $148.8 million, up 19.3% year over year. The year-over-year increase was mainly due to growth in online video and real estate advertising businesses.
Search and others revenues were $98.4 million, up 88.2% year over year. The year-over-year increase was mainly due to increases in the number of paid clicks and higher average cost per click.
Online game revenues for the third quarter of 2014 were $150.3 million, down 6.9% year over year. The year-over-year decline was primarily due to decreased revenues from Wartune and DDTank in China.
Sogou’s third quarter revenues reached $106 million, representing a decent 86% year-on-year growth. Changyou’s platform initiatives appeared to be well on track with the third quarter achieving 275 million average monthly active users of platforms channels.
Margins
Gross margin contracted 810 basis points (bps) from the year-ago quarter to 57.8%. The year-over-year decrease in gross margin was primarily due to increases in content and bandwidth costs.
Operating expenses jumped 51.8% year over year to $289.4 million. The year-over-year increase in operating expenses was mainly due to an increase in salaries and compensation expenses as a result of increased headcount and higher marketing and promotional expenses.
The sharp increase in operating expenses hurt operating margins. Operating loss was $40.7 million in the reported quarter compared to a profit of $52.2 million in the year-ago quarter.
Net loss attributable to Sohu was $28.5 million or 74 cents per share compared to net profit of $21.5 million or 45 cents per share reported in the year-ago quarter.
Balance Sheet & Cash Flow
Sohu exited the third quarter with cash and cash equivalents of $1.1 billion compared with $1.05 billion in the previous quarter.
Outlook
For the fourth quarter of 2014, Sohu expects revenues in the range of $442 million–$462 million while the Zacks Consensus Estimate for the same is pegged at $453 million. Management estimates brand advertising revenues in the range of $145 million to $150 million, representing 18% to 22% year-over-year growth.
Sogou revenues are expected to be in the range of $118 to $123 million, representing 68% to 75% year-over-year growth. Online game revenues are expected in the $155 million–$165 million range.
Our Take
We believe that strong traffic growth in the search, online video and mobile businesses will drive top-line growth, going forward. Moreover, strong growth potential exists in the online gaming business. Additionally, the partnership with Tencent will boost Sogou’s traffic, which will further drive Sohu’s top line going forward.
Further, with continued organic growth and the support of Tencent's vast online properties, Sogou's market share in PC and mobile search is expected to expand further over time. However, we believe that there is still substantial room for Sogou to improve its search monetization capability.
However, Sohu is a relatively small player in the online advertising market and continuing investments in product development are necessary to expand its market share. This will however keep margins under pressure in the near term but strengthen the long-term competitiveness of the company in China.
Despite higher spending, we believe that market share gain will be difficult in the near term due to stiff competition from the likes of Baidu, Inc. (BIDU), Akamai Technologies (AKAM), AOL Inc (AOL) and such others in most of its operating markets.
Currently, Sohu has a Zacks Rank #3 (Hold).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment