INTERNET – Results Show Sputtering Sohu, As Search Picks Up
Bottom line: Sohu’s latest results hint at lingering weakness in online games and Internet advertising, while online video also continues to suffer amid a regulatory crackdown.
The latest results from diversified web portal Sohu (Nasdaq: SOHU) are quite a mixed bag, with its lackluster search business finally showing some promising signs of accelerating growth, even as its core advertising and online gaming businesses sputter. Then there’s its money-losing online video business, which is facing a growing number of hurdles due to a regulatory crackdown, just as the unit looks set to make a minor acquisition that probably won’t add very much to its future prospects.
With so many pieces to this company, it’s no wonder that investors weren’t too sure what to make of Sohu’s latest results, which sparked a modest 3.5 percent rally in its shares. Even after that rally, Sohu’s stock is down about 30 percent this year, in sharp contrast to most Chinese Internet stocks that have rallied sharply. Despite its relatively small size, the company is usually worth a detailed look since it’s one of the first of China’s Internet companies to report quarterly results and it also covers many key business areas.
Sohu’s biggest revenue engines have always been advertising from its oldest portal business and online games from its Changyou (Nasdaq: CYOU) unit, neither of which looked too impressive in the latest results. The company’s advertising business, which accounts for more than a third of total revenue, grew just 19 percent in the third quarter, down sharply from the 50 percent growth at the end of last year.
Online game revenue actually shrank 9 percent in the quarter, continuing a trend that hardly looks positive. The online game turbulence is hardly unique to Changyou, and many of China’s other mid-sized gaming companies are seeing similar trends. (previous post) The weakness has just claimed a new victim at Changyou, as the company announced the resignation of CEO Tao Wang in its latest results.
The one relatively bright spot for Sohu was its Sogou search business, which combined last year with Tencent’s (HKEx: 700) Soso search engine and now has about 13 percent of the market. Sogou’s revenue growth actually accelerated in the third quarter, rising 86 percent as the figure crossed the $100 million mark for the first time. Usually revenue growth slows as a company grows, so the fact that growth accelerated from 72 percent at the end of last year means that perhaps Sohu is getting some traction from the Tencent tie-up.
Lastly there’s the video piece, which is only briefly mentioned in Sohu’s announcement as one of several units that showed “strong traction”. That would seem to indicate the unit is still losing big money, with no prospects of becoming profitable anytime soon due to a regulatory crackdown that began this spring. The unit is unlikely to get any help from a relatively small pending purchase that’s also in the headlines, with reports that Sohu has closed a deal to buy the 56.com online video unit of social networking service operator Renren (NYSE: RENN). (English article; Chinese article)
Sohu has also given some fourth-quarter guidance that looks like many of the current trends will continue. Advertising will continue to be weak, with revenue only expected to grow about 20 percent; gaming revenue will continue to dip by 4-10 percent; and search revenue will slow a bit to about 72 percent. The company hints that it may report another loss this quarter, which would be its fourth consecutive quarterly loss due to soaring expenses and slow development of its new businesses.
The results certainly don’t look too good for a number of companies that will report soon, including ones like Phoenix New Media (NYSE: FENG) that rely heavily on advertising; gaming companies like Perfect World (Nasdaq: PWRD); and online video firms like Youku Tudou (NYSE: YOKU). All told, Sohu’s results indicate we could be looking at a lackluster earnings season ahead for many of China’s Internet firms.
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