Sohu.com (SOHU) Down 28.9% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Sohu.com (SOHU). Shares have lost about 28.9% 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 Q4 Earnings Beat Estimates, Revenues Up Y/Y

Sohu.com reported fourth-quarter 2019 non-GAAP loss of 45 cents per share, which was narrower than the Zacks Consensus Estimate of a loss of 69 cents. The company had reported earnings of 37 cents in the year-ago period.

Revenues were up 5% year over year to $490 million. On a constant-currency basis, revenues grew 7% year over year.

The year-over-year growth in the top line was driven by improved performance of the company’s online game and other businesses, and cost-saving initiatives in Sohu Media and Sohu Video segments.

Top-Line Details

Total online advertising revenues decreased 5% year over year to $316 million.

Brand advertising revenues in the reported quarter fell 27% on a year-over-year basis to $42 million due to decreases in portal and video advertising revenues.
 
Search and search-related revenues were down 1% year over year to $275 million.

Meanwhile, Online game revenues of $132 million grew 40% 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.

Moreover, other revenues increased 15.1% year over year to $41.7 million.

Media Portal and Video revenues were $23 million and $22 million, respectively.

Sogou’s revenues increased 1% year over year to $301 million.

Sogou’s search and mobile keyboard integrated with AI technology witnessed healthy growth. Sogou Mobile Keyboard daily active users (DAUs) reached 464 million, up 14% year over year.

Notably, in October, Sogou renewed its corporation with WeChat. Sogou Search will continue to be the preferred search engine on WeChat for third parties search services to access external/internal content.

Sogou maintained its position as the “second-largest search engine” based in China. Meanwhile, Sogou Mobile Keyboard continues to be the “third largest Chinese mobile app” on expanding user base.

Changyou’s revenues improved 35% year over year to $135 million. Apart from solid performance by TLBB PC and the Legacy TLBB mobile titles, the company benefitted from TLBB Honor — the new mobile game launched during the last quarter — and the new expansion pack for TLBB PC launched the during the fourth quarter performed well.

Margins

Non-GAAP gross margin in the quarter expanded 600 bps on a year-over-year basis to 52%.

Online advertising non-GAAP gross margin rose 700 bps on a year-over-year basis to 39%. Brand advertising business margin expanded 500 bps on a year-over-year basis to 31%.

Moreover, non-GAAP gross margin of the search and search-related business in the reported quarter grew 400 bps to 40%. The year-over-year and quarter-over-quarter increases primarily resulted from decreases in traffic acquisition cost as a percentage of search and search related advertising revenues.

However, online games non-GAAP gross margin contracted to 75% from 85% reported in the year-ago quarter primarily due to an increase in the revenue contribution from new mobile games, primarily TLBB Honor, which typically require larger revenue-sharing payments compared with PC games and Legacy TLBB Mobile.

Non-GAAP operating expenses were $204 million, down 17% year over year.

Sohu’s non-GAAP operating income was $49 million. The company had reported an operating loss of $34 million in the year-ago quarter.

Balance Sheet

As of Dec 31, 2019, Sohu’s cash and cash equivalents (and short-term investments) came in at $1.63 billion compared with $1.563 billion as of Sep 30.

First-Quarter Guidance

Sohu expects total revenues between $400 million and $435 million.

Brand Advertising revenues are anticipated in the range of $25-$30 million, indicating a year-over-year decrease of 30-42%.

Online game revenues are expected in the band of $120-$130 million, suggesting a year-over-year increase of 21-31%.

Sogou revenues are projected to be $240-$260 million, implying a year-over-year decrease of 5% to an increase of 3%.

Non-GAAP net loss is expected between 65 cents and 90 cents per ADS.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 16.44% due to these changes.

VGM Scores

At this time, Sohu.com has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

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

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise Sohu.com has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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