Chinese online media company Sohu.com Inc. (SOHU) Monday reported a decline in fourth quarter net profit, reflecting higher operating expenses, despite an increase in revenues. However, Sohu said it is well-positioned to capitalize on online advertising recovery as brands continue to turn to the company for new advertising solutions. Meanwhile its subsidiary Changyou.com Ltd. (CYOU) reported a 34% increase in fourth quarter net profit, helped by higher revenues and lower costs. Both Sohu and Changyou provided an earnings and revenue guidance for the first quarter of fiscal 2010.
Sohu.com's Fourth Quarter Results:
For the fourth quarter, net income attributable to Sohu.com was US$32.35 million or US$0.76 per share as compared with US$56.63 million or US$1.45 per share in the prior-year period. On an adjusted basis, net earnings slumped to US$39.35 million or US$0.92 per share from US$59.02 million or US$1.5 per share a year earlier.
On average, seven analysts polled by Thomson Reuters expected the company to earn US$0.91 per share for the quarter. Analysts' estimates typically exclude special items.
Beijing, China-based Sohu's total revenues for the period rose 12% to US$135.83 million from US$121.57 million in the fourth quarter of fiscal 2008. Analysts expected the company to generate revenues of US$137.40 million for the quarter.
Quarterly revenues from brand advertising totaled US$45.88 million versus US$45.02 million last year, sponsored search revenues were US$2.93 million compared to US$1.63 million in the previous-year quarter, and online game revenues increased to US$70.70 million from US$58.39 million in the fiscal 2008-year quarter. However, revenues from wireless and others edged down to US$16.33 million from US$16.53 million a year ago, primarily attributable to China Mobile discontinuing billing for WAP services in late November.
For the three-month period, total operating expenses increased to US$48.76 million from US$41.66 million in the previous year. Total cost of revenues were up to US$33.83 million from US$30.23 million in the same quarter last year. In the fourth quarter, the company had other income of US$239 thousand as compared to an expense of US$54 thousand in the prior year.
Gross profit for the fourth quarter increased to US$102 million from US$91.34 million in the fiscal 2008-year period, and gross margins were 75%, flat with the fourth quarter of the previous year.
Commenting on the results, Chairman and Chief Executive Officer Charles Zhang said, "Changyou's massively multi-player online role-playing games, or MMORPG, business began operations as a business unit within Sohu in 2003. Changyou was carved out as a separate stand-alone company in December 2007.
During the 2009 fourth quarter, under the stock repurchase program approved by the board in the third quarter of 2008, Sohu repurchased 751,224 shares common stock at an average price of US$53.26 for a total consideration of US$40 million. As of December 31, 2009, Sohu had purchased 1.25 million Sohu shares in open market, at an average price of US$47.89 for a total consideration of US$60.0 million.
In the preceding third quarter, attributable net income decreased to US$37.35 million or US$0.88 per share from US$40.26 million or US$1.02 per share last year. Total revenues for the quarter grew to US$136.59 million from US$120.68 million in the third quarter of fiscal 2008.
Sohu.com's Full Year Performance:
For fiscal 2009, Sohu's attributable net income was US$147.83 million or US$3.57 per share from US$158.64 million or US$4.06 per share in the previous year. Adjusted net earnings were US$165.85 million or US$3.98 per share versus US$169.26 million or US$4.29 per share in the corresponding period last year. For the 12-month period, the company had a one-time gain of US$446 thousand from discontinued e-commerce operations. Full year revenues were US$515.24 million, up 20% from US$429.05 million in fiscal 2008. Analysts expected the company to report earnings of US$3.78 per share on revenues of US$516.67 million for the year.
Sohu.com's First Quarter Guidance:
Looking ahead to the first quarter of fiscal 2010, Sohu anticipates total revenues to be in a range of US$123 million to US$128 million, with advertising revenues between US$40 million and US$42 million. The company estimates first quarter brand advertising revenues to be between US$38 million and US$40 million, and online game revenues to be between US$70 million and US$73 million.
After deducting the share of adjusted net income pertaining to non-controlling interest in Changyou, Sohu expects adjusted net income for the first quarter to be between US$31 million and US$33 million and adjusted earnings in a range of US$0.78 per share to US$0.83 per share. Analysts expect the company to earn US$0.88 per share on revenues of US$139.93 million for the first quarter 2010.
Including the impact of recent new grants of share-based awards, Sohu said it anticipates compensation expense and income tax expense with regard to share-based awards for the first quarter to be in a range of US$6.5 million to US$7.5 million, including Changyou's share-based compensation expense estimated to be between US$3 million and US$3.5 million. Considering Sohu's share in Changyou, the expected impact of this expense is anticipated to reduce Sohu's first quarter earnings per share by US$0.14 per share to US$0.16 per share.
Going forward, the company foresees advertisers to increase their marketing activities in 2010 with events like World Cup, Asian Games and World Expo. Chairman and chief executive officer Charles Zhang said, "While our three healthy and growing existing games continue to deliver solid revenues, our highly anticipated and diverse 2010 pipeline of five games will bring us increasing momentum in the coming quarters. Our second in-house developed game Duke of Mount Deer, one of the most anticipated online games in China, is progressing smoothly."
Changyou's Fourth Quarter Results:
In a separate release, Chinese online game developer and operator Changyou.com Ltd. reported fourth quarter net income of US$38.86 million as compared to US$29.07 million in the last-year quarter. Net income per American Depository Shares, or ADS, increased to US$0.73 from US$0.61 in the previous-year quarter. On an adjusted basis, net earnings were US$42.19 million or US$0.79 per ADS, up 39% from US$30.29 million or US$0.64 per ADS in the 2008-year period. Adjusted results exclude share-based compensation expenses.
On average, seven analysts polled by Thomson Reuters expected the company to earn US$0.73 per share for the quarter. Analysts' estimates typically exclude special items.
Total revenues for the period increased 21% to US$70.70 million from US$58.39 million in the fourth quarter of fiscal 2008.
Revenues from game operation totaled US$68.62 million versus US$56.41 million in the same quarter last year, while overseas licensing revenues rose to US$2.08 million from US$1.98 million in the prior-year period.
For the three-month period, total operating expenses were US$21 million as compared with US$20.17 million in the corresponding period last year. Product development costs declined to US$6.89 million from US$6.97 million last year, sales and marketing expenses were US$9.55 million versus US$9.95 million. However, general and administrative costs were US$4.56 million compared to US$3.25 million a year earlier.
Quarterly gross profit rose 21% to US$65.28 million from US$54.01 million in the comparable period prior year, and gross margin was 92%, flat with the fourth quarter of 2008.
In the preceding third quarter, Changyou's net income moved up to US$37.79 million or US$0.71 per ADS from US$32.08 million or US$0.68 per ADS in the year-ago quarter. Quarterly revenues climbed to US$68.68 million from US$54.60 million in the third quarter of fiscal 2008.
Changyou's Full Year Performance:
For fiscal 2009, Changyou's net income increased 34% to US$144.68 million or US$2.81 per ADS from US$107.99 million or US$2.27 per ADS in the previous year. Adjusted earnings for the period were US$158.09 million or US$3.05 per ADS compared to US$113.33 million or US$2.39 per ADS in the year-ago period.
Full year revenues were up 33% at US$267.59 million compared to US$201.85 million in fiscal 2008. Analysts expected the company to earn US$2.83 per share on revenues of US$267.82 million for the full year 2009.
Changyou's First Quarter Outlook:
Going forward, Changyou expects adjusted net income for the first quarter of fiscal 2010 to be in a range of US$41 million to US$42.5 million, and adjusted earnings per ADS to be between US$0.77 and US$0.80. The company estimates total first quarter revenues to be between US$70 million and US$73 million. Analysts expect Changyou to earn US$0.74 per share on revenues of US$73.19 million for the quarter.
Assuming no new grants of share-based awards, Changyou said it anticipates share-based compensation expense for the first quarter to be in a range of US$3 million to US$3.5 million, reducing earnings by US$0.06 to US$0.07 per ADS.
Separately, Changyou also announced the appointment of its Chief Operating Officer Dewen Chen as President. Chen is one of Changyou's founders and has been with the company since 2005.
In Friday's regular trading session, SOHU closed trading at $50.35 per share on the Nasdaq. In the past 52-week period, the stock has been trading in a range of $37.90 to $72.29.
CYOU closed Friday's regular trading session at 33.59 per share on the Nasdaq. In the past 52-week period, the shares have been trading in a range of $19.00 to $48.37.
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