A leading online brand and Internet
portal in China, Sohu.com Inc. (SOHU) reported
strong second quarter 2011 results, driven by robust revenue
growth, partially offset by higher expenses.
Earnings per share (EPS) of $1.10
(including stock-based compensation) increased 34.1% from 82 cents
reported in the year-ago quarter. Quarterly EPS also beat the Zacks
Consensus Estimate of $1.06. However, EPS fell short of the
company’s guided range of $1.13 to $1.18.
Second quarter earnings exclude
Sohu’s non-controlling interest in the online gaming company
Changyou.com Ltd. (CYOU).
Operating
Performance
Gross profit was up 35.7% year over
year to $145.5 million. Gross margin on a non-GAAP basis was 73.2%,
down 20 basis points (bps) from the year-ago quarter.
The company’s margins were affected
by the year-over-year decline in online games gross margin, which
stood at 90.0% versus 91.0% in the year-ago quarter. Wireless gross
margin plummeted 900 bps on a year-over-year basis to 39.0% in the
second quarter.
Online brand advertising gross
margin was 62.0% in the reported quarter, up from 58.0% reported in
the prior-year quarter. Gross margin for the Search business was
55.0%, a huge increase from 14.0% reported in the year-ago quarter,
due to higher volumes.
Operating expenses shot up 37.0%
year over year to $76.8 million in the quarter due to the higher
product development cost (up 47.3% year over year), sales &
marketing expense (up 29.4% year over year) and general &
administrative expense (up 38.3% year over year).
Operating profit decreased 6.0%
year over year to $68.8 million due to higher operating expenses.
The operating margin was flat year over year.
Revenue
Total revenue increased 36.0% year
over year to $198.7 million in the reported quarter and surpassed
the Zacks Consensus Estimate of $191.0 million.
Reported revenue also exceeded
management’s expected range of $188.0 million to $193.0 million.
The increase was primarily driven by higher brand advertising, a
strong search business and online gaming revenues.
Brand advertising revenue in the
quarter grew 27.3% year over year to $67.7 million, handily beating
management’s guided range of $65.5 million to $67.5 million. The
better-than-expected results were mainly driven by the increasing
number of brand advertising customers and strong advertising demand
from the IT sector including e-commerce companies.
Search revenue soared 248.7% year
over year to $13.6 million in the second quarter. The
year-over-year growth was mainly driven by increased search traffic
and improved monetization of traffic.
Online game revenues increased
30.6% year over year to $101.5 million, surpassing management’s
expectation of $95.0 million to $97.0 million. The increases were
mainly due to the continued popularity of Tian Long Ba Bu (TLBB) in
China during the quarter and incremental revenue growth from the
7Road acquisition by Changyou.
Online gaming revenues grew on the
back of higher active paying accounts (APA) and user base
expansion. Aggregate registered accounts for Changyou's games
jumped 34.0% year over year.
Average revenue per user (ARPU) was
up 15.0% year over year. Aggregate peak concurrent users for
Changyou’s games were approximately 1.0 million, down 15.0% year
over year.
Wireless revenues increased 5.2%
from the year-ago quarter to $11.6 million.
Balance Sheet
As of June 30, 2011, Sohu had a
cash position of $734.1 million, compared with $737.9 million at
the end of March. At the end of the quarter, Sohu had no debt on
its balance sheet.
Outlook
Sohu provided an upbeat third
quarter 2011 guidance, beating the Zacks Consensus Estimate. For
the third quarter, Sohu expects total revenue in the range of
$225.0 million to $230.0 million.
Sohu estimates brand advertising
revenues in the range of $75.0 million to $77.0 million, implying a
sequential growth of 11.0% to 14.0% and year-over-year growth of
27.0% to 30.0%.
Revenue from Changyou is expected
to be between $115.0 million and $118.0 million, of which revenues
from online games are expected in the $112.0 million to $114.0
million range.
Management anticipates Sogou
revenues of $16.0 million for the third quarter.
Sohu projects net income on a
non-GAAP basis, after deducting the non-controlling interest in
Changyou, in the range of $47.0 million to $49.0 million and EPS in
the range of $1.20 to $1.25. The current Zacks Consensus Estimate
for the third quarter is pegged at $1.19 per share.
Recommendation
Sohu is expected to benefit from
its strength in online games and China’s growing online advertising
industry. The company is also expected to benefit from strong
growth in the online video market and increase in advertising
spending for 2011.
Most recently, Changyou launched
its highly anticipated game Duke of Mount Deer. Changyou has also
begun open-beta testing of Legend of Ancient World, a
massively multi-player online role-playing game. We believe that
Sohu’s promising games portfolio and the growing popularity of
Changyou’s games will drive profitability over the long term.
However, Sohu continues to face cut
throat competition from Baidu Inc. (BIDU) and
Sina Corp. (SINA). We, therefore, maintain our
Neutral recommendation on the stock over the long term. Currently,
Sohu has a Zacks #2 Rank, which implies a short-term Buy
rating.
BAIDU INC (BIDU): Free Stock Analysis Report
CHANGYOU.COM (CYOU): Free Stock Analysis Report
SINA CORP (SINA): Free Stock Analysis Report
SOHU.COM INC (SOHU): Free Stock Analysis Report
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