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Why Is Sohu.com (SOHU) Down 15.5% Since Last Earnings Report?

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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 15.5% 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 its most recent earnings report in order to get a better handle on the important drivers.

Sohu.com’s Q3 Loss Narrower Than Expected, Revenues Fall Y/Y

Sohu.com reported third-quarter 2020 non-GAAP loss of 39 cents per share, which was narrower than the Zacks Consensus Estimate of a loss of 51 cents and the year-ago quarter’s loss of 85 cents per share.

Revenues were down 6% year over year to $158 million.

On Sep 29, Sohu.com announced that its subsidiary Sogou (SOGO) entered into a definitive agreement with THL A21 Limited, Titan Supernova Limited and Tencent Mobility Limited, each of which is a direct or indirect wholly-owned subsidiary of Tencent Holdings Limited (TCEHY). Per the deal, Titan Supernova Limited will be merged with Sogou in an all-cash transaction. Sogou will become an indirect wholly-owned subsidiary of Tencent.

On the same date, Sohu.com entered into a Share Purchase Agreement. Per the terms, the company agreed to sell all of Sogou Class A and Class B ordinary shares to Tencent at a purchase price of $9 per share, shortly before the completion of the merger transaction between Tencent and Sogou.

Per the deal, Sohu Search will receive aggregate consideration in the share purchase of more than $1.18 billion in cash. Sohu will no longer have any beneficial ownership interest in Sogou.

Accordingly, Sogou's results of operations have been excluded from the company's third-quarter 2020 results from continuing operations.

Top-Line Details

Brand advertising revenues for the third quarter of 2020 totaled $41 million, down 11% year over year due to the negative impact of the coronavirus outbreak on the brand advertising industry.

Markedly, the company witnessed sequential increase in revenues from the portal and video advertising businesses.

Moreover, online game revenues of $101 million declined 6% from the year-ago quarter’s levels. The downtick was primarily due to decline in revenues of Legacy TLBB Mobile and TLBB Honor.

For PC games, total average monthly active accounts were 2 million, down 5% year over year. For mobile games, total average monthly active accounts were 3.8 million, an increase of 9% year over year driven by the launch of Illusion Connect in South Korea in the third quarter of 2020.

Meanwhile, other revenues increased 17.9% year over year to $15.5 million.

Media Portal revenues came in at $25 million, down 3% year over year, while Sohu Video revenues of $23 million increased 1% year over year.

Changyou’s revenues declined 6% year over year to $104 million. Changyou posted an operating profit of $33 million compared with $35 million in the same quarter last year.

For the third quarter of 2020, Changyou's online games performed well. For PC games, Changyou launched this year's second in-game promotional event. Moreover, for mobile games, Changyou launched a new expansion pack for legacy TLBB mobile, featuring the addition of new plan and a new method of character development.

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 expanded 300 bps on a year over year basis to 66%.

Brand advertising business margin remained flat year over year at 31%. Meanwhile, online games non-GAAP gross margin expanded 200 bps to 80%.

Non-GAAP operating expenses were $109 million, down 11% year over year mainly due to lower marketing expenses.

Sohu’s non-GAAP operating loss was $5 million. The company had reported an operating loss of $17 million in the year-ago quarter.

Balance Sheet

As of Sep 30, 2020, Sohu’s cash and cash equivalents (and short-term investments) came in at $192 million compared with $1.35 billion as of Jun 30, 2020.

Fourth-Quarter Guidance

Brand advertising revenues are anticipated in the range of $37-$42 million, which indicates year-over-year decline of 11%.

Online game revenues are expected in the band of $140-$150 million, which indicates year-over-year increase of 6-14%.

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?

It turns out, estimates revision have trended downward during the past month.


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