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Sohu.com (SOHU) Stock Falls on Q2 Loss, Revenues Decline

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Sohu.com Inc. (SOHU - Free Report) reported adjusted loss of $1.64 a share in the second quarter of 2016, which compared unfavorably with the prior-year quarter loss of 70 cents per share. Even revenues in the quarter were down 15% to $420 million primarily due to lower revenues from online gaming.

As a result of this, the company shares fell nearly 2% in yesterday’s trading session to close at $37.91.

Segment Details

Total online advertising revenues, which include revenues from brand advertising, search and web directory businesses, were $273 million, down 5% year over year.

Brand advertising revenues in the reported quarter totaled $113 million, down 25% year over year owing to sluggishness in the online video business. The company’s revenues from Sohu Media Portal decreased 10% year over year to $47 million while that from Sohu Video fell 44% to $32 million.

Search and search-related revenues totaled $160 million, a robust increase of 18% on a year-over-year basis owing to growth in mobile traffic and monetization.

Online game revenues for the quarter were $99 million, down 42% on a year-over-year basis as a result of lower revenues from older games and a decline in web game revenues due to the earlier divestment of the 7Road business.

Sogou’s revenues were $176 million, representing a significant 19% year-over-year increase driven by higher search-related revenues. However, Changyou’s revenues plummeted 36% on a year-over-year basis to $129 million.

Margins

Non-GAAP gross margin in the quarter decreased to 49% from 55% in the year-ago quarter. Non-GAAP gross margin of the company’s online advertising business was 39%, down from 45% in the prior-year quarter while brand advertising business margin was 17%, a sharp drop from 34% reported in the year-ago quarter. Non-GAAP gross margin for the search and search-related business in the quarter was 55%, down from 57% in the year-ago quarter.

Non-GAAP gross margin of the company’s online game business was 74%, down from 75% in the prior-year quarter.

Balance Sheet

Sohu exited the quarter with cash and cash equivalents (and short-term investments) of $1.4 billion, compared with $1.42 million as of Dec 31, 2015.

Outlook

For the third quarter of 2016, Sohu expects revenues in a range of $400 million–$430 million.

Management estimates brand advertising revenues in a range of $110 million to $120 million, representing 21% to 27% year-over-year decline. The company expects to generate about $47 million to $50 million revenues from Sohu Media Portal and $32 million - $36 million from Sohu Video.

Sogou revenues are expected to be in a range of $165 million to $175 million, representing 2% to 8% year-over-year growth. Online game revenues are expected in the $90 million–$100 million range, indicating a year-over-year decline of 34% to 41%

The company expects non-GAAP loss per share to be between $2.35 and $2.60.

SOHU.COM INC Price, Consensus and EPS Surprise

SOHU.COM INC Price, Consensus and EPS Surprise | SOHU.COM INC Quote

To Conclude

Sohu is a relatively small player in the online advertising market and continuing investments in product development are necessary to expand its market share. But for the past few months, the company’s business has been impacted by volatile macroeconomic conditions in China, in addition to persisting sluggishness in its brand advertising business. Furthermore, the company has been cutting down its spending levels, which makes market share gain more difficult due to stiffening competition from peers like Baidu, Inc. (BIDU - Free Report) , Akamai Technologies (AKAM - Free Report) and SINA Corp. .

Nonetheless Sohu can benefit from strong traffic growth in search and mobile businesses. The company expects strength in Sogou to continue going ahead. Sogou is likely to benefit from increased investment in its search division. On the other hand, the company is redefining its business strategy for Changyou, which will likely be a key long-term driver despite some setbacks in the near term.

Currently, Sohu has a Zacks Rank #3 (Hold).

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