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Sohu.com (SOHU) Down 12.8% 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 12.8% 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 Inc. reported second-quarter 2018 results wherein both the top and the bottom lines recorded improvement from the year-ago figures.

The company reported non-GAAP loss of $1.27 per share, which was much narrower than the year-ago quarter’s loss of $1.85. The figure was also better than management’s expectation of a loss between $1.40 and $1.65.

Sohu’s revenues of $486 million were up 5.4% year over year and came above the lower end of the guided range of $485–$510 million.

Management however appeared disappointed with the top-line performance, which was primarily attributable to the headwinds faced by the company’s brand advertising business. Nevertheless, they were optimistic about the cost stringent approach that positively impacted the bottom-line figure.
      
Quarter Details

Total online advertising revenues (inclusive of revenues from brand advertising, search and search related businesses) increased 21.6% year over year to $331.9 million.

Brand advertising revenues in the reported quarter however fell 28.5% on a year-over-year basis to $61.5 million, mainly due to decrease in portal and real estate advertising.

Search and search-related revenues increased 44.8% year over year to $270.4 million driven by growth in mobile search traffic and improved monetization.

Online game revenues of $94.3 million were down 23% from the year-ago quarter primarily due to “natural decline in revenue of Changyou's older games, including Legacy TLBB Mobile and Dao Jian Dou Shen Zhuan.”

Sohu Video revenues decreased 26% from the year-ago quarter to $32 million. Management is however optimistic about its original content and “lower spending on licensed content.”

Sohu Media Portal revenues fell 2% on a year-over-year basis to $43 million owing to intense competition in the online media industry. However, management stated that the company is focusing on increasing the user base of Sohu news application with an eye for “product design and content quality.”

Sogou’s revenues surged 43% year over year and 21% from the previous quarter to $301 million. Its core search revenue segment witnessed 45% year-over-year growth. The number of daily average users of Sogou Mobile Keyboard increased 36% from the year-ago period to $380 million.

Changyou’s revenues declined 25% year over year and 18% sequentially to $130 million.

Margins

Non-GAAP gross margin in the quarter expanded 400 basis points (bps) on a year-over-year basis to 44%.

Non-GAAP gross margin of the company’s online advertising business was 35%, up from 19% in the prior-year quarter.

Brand advertising business margin was 23% against negative 45% in the year-ago quarter. Non-GAAP gross margin of the search and search-related business in the quarter contracted to 38% from the year-ago figure of 48%.

Non-GAAP gross margin of the online game business contracted 600 bps to 85% due to decline in Legacy TLBB game, which has  high gross margin.

Sohu’s non-GAAP operating loss was $31 million compared with a loss of $27 million in the year-ago quarter.

Balance Sheet

Sohu exited the quarter with cash and cash equivalents (and short-term investments) of $1.89 billion compared with $3.31 billion as of Mar 31, 2018.

Outlook

For the third quarter of 2018, Sohu expects total revenues in the range of $445–$470 million.

Brand Advertising revenues are anticipated to be in the range of $60-$65 million, indicating a year-over-year decrease of 13-20%.

Online game revenues are expected in the band of $80-$90 million, marking a decline of 32-40% from the year-ago quarter.

Sogou revenues are projected to be in the range of $275-$285 million, indicating a year-over-year increase of 7-11%

Non-GAAP net loss is anticipated to be in the range of $55-$65 million. Non-GAAP loss per share is projected to be between $1.40 and $1.65.

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?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Sohu.com has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

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

The company's stock is suitable solely for growth based on our style scores.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, 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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