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Sohu (SOHU) Q1 Loss Narrows Year Over Year, Revenues Down

Zacks Equity Research

Sohu.com Inc. SOHU reported first-quarter 2019 non-GAAP loss of $1.39 per share, which was much narrower than the year-ago quarter’s loss of $2.50 per share. The figure also came within the guided range of loss of $1.30 and $1.55.

The narrower year-over-year loss can be attributed to the positive impact of the company’s cost-saving efforts.

The Zacks Consensus Estimate was pegged at a loss of $1.51.

Sohu’s revenues of $431.4 million were down 5.2% year over year but exceeded the guided range of $390–$415 million on strong performance of its search and game businesses.

Sohu.com Inc. Price, Consensus and EPS Surprise

Sohu.com Inc. Price, Consensus and EPS Surprise | Sohu.com Inc. Quote

Quarter Details

Total online advertising revenues (inclusive of revenues from brand advertising, search and search related businesses) increased 0.2% year over year to $277 million.

Brand advertising revenues in the reported quarter however fell 23.6% on a year-over-year basis to $42.9 million, mainly due to decrease in video and portal advertising revenues. Search and search-related revenues increased 6.3% year over year to $234 million.

However, seasonality and sluggish macroeconomic conditions in China negatively impacted ad revenues in the reported quarter. Nevertheless, Sohu’s efforts to minimize the impact by introducing customized solutions for a few of its advertising partners was a positive.

Online game revenues of $99.1 million were down 6.1% from the year-ago quarter, primarily due to “natural decline in revenue of Changyou's older games, including Legacy TLBB Mobile.” Moreover, other revenues declined 24.3% year over year to $55.2 million.

Sohu Video non-GAAP revenues were $26 million, down 16% year over year. Notably, video advertising revenues were $10 million in the first quarter.

Sohu Video’s loss narrowed owing to stringent cost controls. Notably, operating loss was down 43% year over year to $27 million. Additionally, Sohu Video showcased appealing content to its users in the reported quarter.

Sohu Media Portal non-GAAP revenues were down 26% on a year-over-year basis to $23 million. However, in the reported quarter, the “number of articles posted by third party writers” increased 10% sequentially.

Sohu noted that it improved content on the platform by strengthening its partnerships with quality content providers to improve user engagement levels. Additionally, the company improved its news app to get more people to use the product.

Sogou’s SOGO revenues increased 2% year over year to $253 million. Net loss in the reported quarter was $3 million as against net income of $20 million in the year-ago period.

Sogou’s search and mobile keyboard witnessed healthy growth by using its artificial intelligence (AI) technology. Sogou mobile keyboard daily active users (DAUs) reached 443 million, an increase of 23% year over year. Notably, Sogou became the “third largest mobile app in terms of DAU in China”, per iResearch.

Changyou’s CYOU revenues declined 10% year over year to $123 million. In the reported quarter, Changyou’s net income was $37 million against net loss of $16 million in the year-ago quarter.

Margins

Non-GAAP gross margin in the quarter contracted 300 basis points (bps) on a year-over-year basis to 40%.

Non-GAAP gross margin of the company’s online advertising business contracted 600 bps on a year-over-year basis to 23%.

Brand advertising business margin was 20% compared with 9% in the year-ago quarter. The improvement was primarily driven by a decrease in video content cost. Non-GAAP gross margin of the search and search-related business in the quarter was 24% compared with 34% in the year-ago quarter. The decrease was particularly due to higher traffic acquisition cost.

Non-GAAP gross margin of the online game business expanded 200 bps to 86%.

Non-GAAP operating expenses were $214.9 million, down 5.6% year over year owing to reduction in salary and benefit expenses. Sohu’s non-GAAP operating loss was $43.7 million compared with a loss of $33.8 million in the year-ago quarter.

Balance Sheet

Sohu exited the quarter with cash and cash equivalents (and short-term investments) of $1.88 billion compared with $1.86 billion as of Dec 31, 2018.

Q2 Guidance

Sohu expects total revenues in the range of $469–$494 million.

Brand Advertising revenues are anticipated to be in the range of $47-$52 million, indicating a year-over-year decrease of 15-24%.

Online game revenues are expected in the band of $90-$100 million, indicating a year-over- year change of (5%) to 6%.

Sogou revenues are projected to be in the range of $303-$313 million, indicating a year-over-year increase of 1-4%.

Non-GAAP net loss is anticipated to be in the range of $38-$48 million. Non-GAAP loss per share is projected to be between 95 cents and $1.2.

Zacks Rank & A Key Pick

Sohu.com currently carries a Zacks Rank #3 (Hold).

A better-ranked stock in the broader technology sector is Fujifilm Holdings Corp. FUJIY, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Fujifilm is pegged at 7.6%.

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