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Sohu.com (SOHU) Down 12% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Sohu.com (SOHU - Free Report) . Shares have lost about 12% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Sohu.com due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Sohu.com’s Q2 Loss Wider Than Expected, Revenues Fall Y/Y

Sohu.com reported second-quarter 2020 non-GAAP loss of $2.04 per share, which was wider than the Zacks Consensus Estimate of a loss of 12 cents and the year-ago quarter loss of $1.35 per share.

Revenues were down 9% year over year to $421 million.

Top-Line Details

Total online advertising revenues, which include revenues from the brand advertising and search and search-related advertising businesses, were $279 million, down 13% year over year.

Brand advertising revenues in the reported quarter fell 14% on a year over year basis to $38 million due the prevailing negative impact of the coronavirus outbreak on the brand advertising industry.
Search and search-related revenues were down 13% year over year to $241 million.

Nonetheless, online game revenues of $106 million grew 4% from the year-ago quarter, primarily due to the contribution of TLBB Honor and improved performance of some of Changyou's older games, including TLBB PC and Legacy TLBB Mobile, as a result of content updates and some promotional activities during the quarter.

Other revenues decreased 9% year over year to $36.5 million.

Media Portal and Video revenues were $22 million each.

Sogou’s revenues decreased 14% year over year to $261 million.

Sogou’s search and mobile keyboard integrated with AI technology witnessed healthy growth. Sogou Mobile Keyboard daily active users (DAUs) reached 484 million in second-quarter 2020.

Changyou’s revenues improved 3% year over year to $109 million mainly driven by the solid performance of both TLBB PC and the Legacy TLBB Mobile.

For PC games, Changyou launched the new expansion pack of TLBB PC during the quarter with various anniversary events, and also new maps and dungeons were developed using advanced and rendering technologies

Notably, the privatization of Changyou was completed on Apr 17. Changyou's profit will be wholly attributable to Soho.com Limited going forward.

Margins

Non-GAAP gross margin in the quarter contracted 200 bps on a year over year basis to 41%.

Online advertising non-GAAP gross margin contracted to 23% from 33% reported in the year-ago quarter. Brand advertising business margin expanded to 40% compared with 28% in the year-ago quarter mainly due to decreased video content cost.

Moreover, non-GAAP gross margin of the search and search-related business contracted to 21% from 34% reported in the year-ago quarter. The year-over-year decrease primarily resulted from an increase in traffic acquisition cost as a percentage of search and search-related advertising revenues.
Meanwhile, online games non-GAAP gross margin contracted to 78% from 82% reported in the year-ago quarter mainly due to an increase in revenue-sharing payments related to TLBB Honor, which was launched during the third quarter of 2019.

Non-GAAP operating expenses were $187 million, down 13.9% year over year mainly due to decreased marketing expenses.

Sohu’s non-GAAP operating loss was $15.7 million. The company had reported an operating loss of $6.7 million in the year-ago quarter.

Balance Sheet

As of Jun 30, 2020, Sohu’s cash and cash equivalents (and short-term investments) came in at $1.35 billion compared with $1.53 billion as of Mar 31, 2020.

Third-Quarter Guidance

Brand advertising revenues are anticipated in the range of $37-$42 million, indicating year-over-year decrease of 9-20%.

Online game revenues are expected in the band of $85-$95 million, indicating year-over-year decrease of 12-21%.

 

Note: The EPS data mentioned in the text of this section differs from the rest of report due to the difference in calculation or consideration of one-time items.

How Have Estimates Been Moving Since Then?

Estimates revision followed an upward path over the past two months. The consensus estimate has shifted -828.57% due to these changes.

VGM Scores

Currently, Sohu.com has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Sohu.com has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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