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Sohu's (SOHU) Q1 Loss Wider, Revenues Decline Y/Y

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Sohu.com Inc. (SOHU - Free Report) reported first-quarter 2017 non GAAP loss of $1.75 per share, much wider than year ago quarter’s loss of 56 cents. Shares were down 6.44% yesterday.

However, Sohu’s revenues of $374.1 million beat the Zacks Consensus Estimate of $366.7 million. On a year-over-year basis, revenues decreased 8.3% due to lower revenues from advertising and online gaming. RMB depreciation had a big impact on results, adds management.

Quarterly Details

Total online advertising revenues (inclusive of revenues from brand advertising, search and search related businesses) fell 14% to $223 million.

Brand advertising revenues in the reported quarter fell 35% to $81 million on a year-over-year basis driven by declining advertising revenues from video and real estate businesses. Search and search-related revenues increased 6% to $142 million due to growth in search traffic.

Sohu.com Inc. Price, Consensus and EPS Surprise

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

Online game revenues for the quarter plunged 17% year over year to $85 million due to declining revenues from older game titles.

Sogou’s revenues grew 10% to $162 million driven by increase in mobile and search traffic.

Margins

Non-GAAP gross margin in the quarter decreased to 42% from 53% in the year-ago quarter. Non-GAAP gross margin of the company’s online advertising business was 27%, down from 43% in the prior-year quarter.

Brand advertising business margin was 2%, reflecting a sharp drop from 32% reported in the year-ago quarter primarily due to higher video content costs. Non-GAAP gross margin for the search and search-related business in the quarter was 42%, down from 54% in the year-ago quarter.

Non-GAAP gross margin of the company’s online game business was 81% against 75% reported in the prior-year quarter.

Sohu’s non GAAP operating loss was $40 million against profit of $15 million reported in the year-ago quarter.

GAAP loss per share was $1.77 as against 53 cents reported year over year.

Balance Sheet

Sohu exited the quarter with cash and cash equivalents (and short-term investments) of $1.25 billion compared with $1.30 million as of Dec 31, 2016.

Outlook

For the second quarter of 2017, Sohu expects revenues in a range of $390–$420 million.

Management estimates brand advertising revenues in a range of $85 million to $95 million, representing 16% to 25% year-over-year decline.

Sogou revenues are expected in the range of $190 million to $200 million, representing 8% to 14% year-over-year decline. Online game revenues are expected in the band of $75–$85 million, hinting at a year-over-year decline of 14% to 24%.

The company expects non-GAAP loss per share between $1.80 and $2.05. 

Our Take

Sohu’s financials have been impacted by lower online gaming and advertising sales. Specifically, its brand advertising business has remained sluggish because of lower spending levels in China.

However, Sogou continues to gain popularity and market share through increased product quality and effective marketing campaigns. Furthermore, its partnership with Tencent and the sale of 10% of Sogou shares in an IPO to be held in 2017 will further improve the latter’s competitive position against market leader Baidu and SINA Corp. .

We also note that Sohu’s shares lost 17.05% in the past one year, vastly underperforming the Zacks categorized Internet Software industry, which gained 11.28%.

Currently, Sohu carries a Zacks Rank #4 (Sell).

Stocks to Consider

Better-ranked stocks in the broader tech space are Applied Optoelectronics, Inc. (AAOI - Free Report) , which sports a Zacks Rank #1 (Strong Buy) and Leaf Group Ltd , which has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the trailing four quarters, Applied Optoelectronics and Leaf Group delivered an average positive earnings surprise of 116.49% and 27.94%, respectively.

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