Sohu Com Inc. (SOHU)

[eastunder]

Sohu.com Reports First Quarter 2012 Unaudited Financial Results

Monday , April 30, 2012 04:04ET



BEIJING, April 30, 2012 /PRNewswire-Asia-FirstCall/ -- Sohu.com Inc. (NASDAQ: SOHU), China's leading online media, search, gaming, community and mobile service group, today reported unaudited financial results for the first quarter ended March 31, 2012.


First Quarter Highlights

-- Total revenues were US$227 million, up 30% year-over-year and down 8%
quarter-over-quarter.
-- Brand advertising revenues were US$61 million, up 7% year-over-year and
down 22% quarter-over-quarter.
-- Sogou[1] revenues were US$23 million, up 184% year-over-year and down 1%
quarter-over-quarter.
-- Online game revenues reached quarterly record high of US$127 million, up
34% year-over-year and 3% quarter-over-quarter.
-- GAAP net income attributable to Sohu.com Inc. was US$20 million, or
US$0.53 per fully diluted share. Non-GAAP[2] net income attributable to
Sohu.com Inc. was US$24 million, down 46% year-over-year, or US$0.61 per
fully diluted share.

Dr. Charles Zhang, Chairman and CEO of Sohu.com Inc. commented, "In the first quarter, our financial results were mixed. Our brand advertising business got off to a slow start mainly due to the early Chinese New Year holiday and the softening macroeconomic conditions in China."

Dr. Zhang added, "Good news is search revenues and our overall Sogou business continued to deliver solid growth. And we are pleased with the better than expected results of Changyou, our online game subsidiary. Changyou's flagship games, TLBB and DDTank, continued to rank among the top games in China in the MMO and Web-based game categories, respectively. Shen Qu, a new Web-based game, was well-received by gamers upon launch, adding to the top-line results. For the remainder of 2012, Changyou has four new games due for launch that feature different genres and graphic styles, and are expected to draw new communities of users while expanding the user base."

Commenting on Sohu's brand advertising business, Ms. Belinda Wang, Co-President and COO added, "We had a challenging first quarter in our brand advertising business. The economic slowdown in China clearly had an impact on advertiser sentiment. Because of lackluster auto sales and the slowing real estate market, many automakers and real estate developers decided to defer their marketing plans. While the overall market was soft, e-commerce and fast-moving consumer goods sectors performed relatively well, each posting over 30% year-on-year revenue growth in the first quarter."

First Quarter Financial Results

Revenues

Total revenues for the first quarter of 2012 were US$227 million, up 30% year-over-year and down 8% quarter-over-quarter.

Total online advertising revenues, which include revenues from brand advertising and search and others businesses for the first quarter of 2012, were US$83 million, up 27% year-over-year and down 18% quarter-over-quarter.

Brand advertising revenues for the first quarter of 2012 totaled US$61 million, up 7% year-over-year and down 22% quarter-over-quarter. During the first quarter, Changyou integrated the 17173 Business and aims to make 17173 the platform for new services and products targeted for gamers over the coming year. Brand advertising revenues from the 17173 Business, which decreased 34% quarter-over-quarter and increased 4% year-over-year to US$8.2 million.

Search and others revenues for the first quarter of 2012 were US$22 million, up 171% year-over-year and down 6% quarter-over-quarter. The year-over-year increase was mainly due to increase in revenues from pay-for-click services as a result of increased search traffic and improved monetization of traffic, and increase in revenues from online marketing services on the Sogou Web Directory.

Online game revenues for the first quarter of 2012 were US$127 million, up 34% year-over-year and 3% quarter-over-quarter.

Wireless revenues for the first quarter of 2012 were US$13 million, up 14% year-over-year and down 8% quarter-over-quarter.

Gross Margin

Both GAAP and non-GAAP gross margin was 65% for the first quarter of 2012, compared with 71% in the fourth quarter of 2011 and 73% in the first quarter of 2011.

Online advertising gross margin for the first quarter of 2012 was 39%, compared with 59% in the fourth quarter of 2011 and 56% in the first quarter of 2011. Non-GAAP online advertising gross margin for the first quarter of 2012 was 40%, compared with 59% in the fourth quarter of 2011 and 57% in the first quarter of 2011.

Brand advertising gross margin for the first quarter of 2012 was 39%, compared with 61% in the fourth quarter of 2011 and 62% in the first quarter of 2011. Non-GAAP brand advertising gross margin for the first quarter of 2012 was 40%, compared with 61% in the fourth quarter of 2011 and 63% in the first quarter of 2011. The year-over-year decrease in gross margin was primarily due to increases in content and bandwidth costs. The quarter-over-quarter decrease in gross margin was due to decrease in revenues and increase in content and bandwidth costs.

Both GAAP and non-GAAP gross margin for search and others business in the first quarter of 2012 were 39%, compared with 53% in the fourth quarter of 2011 and 16% in the first quarter of 2011. The year-over-year increase in margin was mainly due to higher revenues from online marketing services. The quarter-over-quarter decrease in margin was mainly due to higher traffic acquisition costs (TAC), bandwidth leasing costs and depreciation costs.

Both GAAP and non-GAAP gross margin for online games in the first quarter of 2012 were 87%, compared with 87% in the fourth quarter of 2011 and 91% in the first quarter of 2011. The year-over-year decline was mainly due to higher bandwidth and server costs as Changyou operated a larger portfolio of online games in the first quarter of 2012 and an increase in headcount.

Both GAAP and non-GAAP gross margin for the wireless business for the first quarter of 2012 were 34%, compared with 37% in the fourth quarter of 2011 and 41% in the first quarter of 2011. The year-over-year and quarter-over-quarter decreases were primarily due to increased revenue share with partners.

Operating Expenses

For the first quarter of 2012, operating expenses totaled $95 million, up 48% year-over-year and down 25% quarter-over-quarter. Non-GAAP operating expenses were $92 million, up 55% year-over-year and down 2% quarter-over-quarter. The year-over-year increase in operating expenses was primarily due to an increase in the number of employees and higher expenses associated with marketing and promotion activities.

Operating Profit

Operating profit for the first quarter of 2012 was US$52 million, down 18% year-over-year and up 7% quarter-over-quarter. Operating margin was 23% for the first quarter of 2012, compared with 20% in the previous quarter and 36% in the first quarter of 2011.

Non-GAAP operating profit for the first quarter of 2012 was US$55 million, down 20% year-over-year and 32% quarter-over-quarter. Non-GAAP operating margin was 24% for the first quarter of 2012, compared with 33% in the previous quarter and 39% in the first quarter of 2011.

Income Tax Expense

For the first quarter of 2012, GAAP income tax expense was US$19 million. Excluding a non-cash income tax expense of US$1 million recorded for tax benefits from share-based awards, non-GAAP income tax expense was US$18 million, compared with US$10 million in the previous quarter. The increase in income tax expenses was primarily due to the increase in the applicable tax rates for the major operating entities.

Net Income

Before deducting the share of net income pertaining to the Non-controlling Interest, GAAP net income for the first quarter of 2012 was US$41 million, down 26% year-over-year and 14% quarter-over-quarter. Non-GAAP net income for the first quarter of 2012 was US$45 million, down 26% year-over-year and 42% quarter-over-quarter.

GAAP net income attributable to Sohu.com Inc. for the first quarter of 2012 was US$20 million, or US$0.53 per fully diluted share. Non-GAAP net income attributable to Sohu.com Inc. for the first quarter of 2012 was US$24 million, or US$0.61 per fully diluted share, down 46% year-over-year and 55% quarter-over-quarter.

Cash Balance

Sohu Group continued to maintain a debt-free balance sheet and a cash position of US$761 million as of March 31, 2012.

Stock Purchase Program

On August 29, 2011, Sohu's board of directors authorized a combined share purchase program of up to US$100 million. As of March 31, 2012, Sohu had repurchased 500,000 Sohu's ordinary shares and 750,000 Changyou's ADSs at an aggregated cost of approximately US$55 million under the share purchase program.

Ms. Carol Yu, Co-President and CFO of Sohu.com Inc. commented, "We are pleased with the healthy momentum in our Sogou and Changyou businesses, and are confident that our investments in online video will bring strategic value to Sohu's future competitiveness."

Supplementary Information for Online Game Results

First Quarter 2012 Operational Results

-- Aggregate registered accounts for Changyou's games[3], excluding the
Web-based games of Shenzhen 7Road Technology Co., Ltd. ("7Road"),
increased 62% year-over-year and 7% quarter-over-quarter to 188.5
million.
-- Aggregate peak concurrent users ("PCU") for Changyou's games, excluding
7Road's Web-based games, increased 8% year-over-year and decreased 8%
quarter-over-quarter to 1.08 million.
-- Aggregate active paying accounts ("APA") for Changyou's games, excluding
7Road's Web-based games, increased 8% year-over-year and decreased 2%
quarter-over-quarter to 3.11 million.
-- Average revenue per active paying account ("ARPU") for Changyou's games,
excluding 7Road's Web-based games, increased 7% year-over-year and 2%
quarter-over-quarter to RMB225.

Business Outlook

For the second quarter of 2012, Sohu estimates:

-- Total revenues to be between US$244 million and US$250 million.
-- Brand advertising revenues to be between $68 million and $71 million;
this implies a sequential increase of 12% to 16%, and a year-over-year
increase of 0.4% to 5%. This includes revenues from 17173 of US$8.5
million to US$9.5 million, which implies a sequential increase of 4% to
16% and a year-over-year increase of 3% to 15%.
-- Sogou revenues to be around US$29 million; this implies a sequential
increase of about 28% and an annual growth of about 113%.
-- Online game revenues to be between US$130 million and US$133 million.
This implies a sequential increase of 2% to 4% and represents an annual
growth of 28% to 31%.
-- Before deducting the share of non-GAAP net income pertaining to the
Non-Controlling interest, non-GAAP net income to be between US$34
million and US$37 million.
-- Non-GAAP net income attributable to Sohu.com Inc. to be between US$15.5
million and US$17.5 million, and non-GAAP fully diluted earnings per
share to be between US$0.40 and US$0.45.
-- Assuming no new grants of share-based awards, we estimate that
compensation expenses and income tax expenses relating to share-based
awards to be around US$3 million to US$4 million. The estimated impact
of this expense is expected to reduce Sohu's fully diluted earnings per
share for the second quarter of 2012 under US GAAP by 8 to 10 cents.




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