It was almost inevitable that China’s second biggest web portal, Sohu.com (Nasdaq: SOHU) was destined to disappoint investors with its fourth-quarter results, after it notched a blowout third quarter on the strength of potential in its online search and video services. So it shouldn’t come as too big a surprise that investors used the company’s results, which saw its profit fall 40 percent, largely due to a one-time write-off, to sell Sohu shares, which tumbled 15 percent after the report came out. (company announcement) I’ve looked through the report, and will say there’s nothing in there that’s particularly alarming. Instead, the report seems to lack any real excitement, and could auger more uninspired results from China’s other web companies when they report in the weeks ahead. One of the few potentially worrisome figures is the 2 percent quarter-on-quarter growth in brand advertising revenue, which marked a relatively sharp slowdown from the 13 percent growth in the previous reporting period. Also potentially worrisome was the company’s failure to mention its video sharing business, which saw revenues double in the previous quarter as the industry experienced strong growth. Many are expecting Sohu to eventually spin off its video sharing business into a separately listed company, so its failure to even mention the business in its earnings report could signal that such a spin-off has been delayed, perhaps as the advertising market starts to slow. Of course the state of China’s advertising market is the big question mark in the middle of Sohu’s report, as the company relies on advertising for nearly half of its revenue, with most of the rest coming from online games. Some signs began to emerge last year that an Internet bubble was building in China, as ad spending soared at a number of top players, most notably search leader Baidu (Nasdaq: BIDU). Now, with growing signs of distress as the Internet bubble starts to pop, it’s possible we’re seeing some signs that explosive advertising growth of the last year will soon slow sharply, and the market could even start to contract as many start-up companies sharply reduce ad spending to slash costs and others simply close. We should get a better picture soon when other companies start to report, including Baidu itself next Thursday. But the picture could get ugly if more weak advertising numbers come out, boding poorly for many of these already beaten-down stocks.
Bottom line: Sohu’s lack of upbeat news in its latest earnings report kicks off an earnings season that will be filled with signs of a looming Internet advertising slowdown.
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