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What's in the Cards for (SOHU) in Q2 Earnings?

Read MoreHide Full Article Inc. (SOHU - Free Report) is set to report second-quarter 2017 results on Jul 31. Last quarter, the company reported non-GAAP loss of $1.75 per share, much wider than a loss of 56 cents in the year-ago quarter. Notably, the company incurred a loss in each of the trailing four quarters.

Revenues decreased 8.3% year over year to $374.1 million but beat the Zacks Consensus Estimate of $366.7 million.  Notably, revenues have declined over the last four quarters.

Sohu raised its second-quarter guidance in June. The company expects revenues in the range of $420-$450 million, up from the previous guidance of $390–$420 million. This was primarily due to higher online game revenues, which are now anticipated to increase in the range of $110-$120 million, compared with the prior guidance of $75-$85 million.

Sohu now expects narrower non-GAAP loss in the range of $1.21-$1.47 per share compared with the earlier guidance of $1.80-$2.05 per share.

The positive guidance reflects positive contribution from Changyou’s Legacy Tian Long Ba Bu (TLBB) mobile game, which was launched on May 16, 17 and 18, 2017.

Since then, Sohu shares have gained 12.3%, substantially outperforming the 4.4% rally of the industry it belongs to.

Let's see how things are shaping up for this announcement.

Factors at Play

The Legacy TLBB mobile game has received positive response within a short span of time. Features of the game have also been simplified to attract the younger generation, which is anticipated to expand its player base. Sohu management noted that the game has been ranked among the top three grossing games in the Apple (AAPL - Free Report) App Store.

Apart from gaming, Sogou search engine also continues to gain popularity through increased product quality and effective marketing campaigns. Furthermore, its partnership with Tencent is expected to improve the company’s competitive position against market leader Baidu.

However, Sohu’s performance has been negatively impacted by lower revenues from advertising, which is otherwise a significant contributor to revenues. Its brand advertising business (contributing almost 22% of first-quarter revenues) has remained sluggish due to lower spending levels in China.

Moreover, RMB depreciation is likely to weigh on Sohu’s top line. Stricter regulations, sluggish Chinese economy and intensifying competition are also major concerns. Inc. Price and EPS Surprise Inc. Price and EPS Surprise | Inc. Quote

Earnings Whispers

Our proven model does not conclusively show that is likely to deliver a positive surprise this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Sohu’s Earnings ESP is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at a loss of $1.73 per share. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Sohu’s Zacks Rank #3 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are a couple of companies that you may want to consider as our model shows that these have the right combination of elements to deliver an earnings beat in their upcoming release:

Kemet Corporation (KEM - Free Report) with an Earnings ESP of +11.11% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

CGI Group (GIB - Free Report) with an Earnings ESP of +5.71% and a Zacks Rank #2.

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