Please ensure Javascript is enabled for purposes of website accessibility Inc. Earnings: Search Isn't Enough

By Rick Munarriz - Feb 3, 2016 at 9:10AM

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The Chinese dot-com pioneer posts quarterly results that top its earlier guidance, but its outlook isn't very inspiring.

Image source: (SOHU 0.24%) is still red hot when it comes to search, but its flagship online brand advertising business and its once-booming Internet gaming arm are getting in the way. The Chinese Internet stock posted $466 million in revenue for its fourth quarter, a sequential dip of 11% but also 2% below where it was during the prior year's final reporting period.

A 31% year-over-year plunge in gaming -- essentially the online gaming arm of (CYOU) -- is the biggest culprit. To be fair, Sohu was going to take a hit after selling its 7Road Web game business during the third quarter. However, it also doesn't help that its older online martial arts games -- TLBB and TLBB 3D -- haven't been replaced by fresher releases. Gaming was so hot a few years ago that it made perfect sense to spin off Changyou. Now it seems as if Sohu has to overcome the slowdown at Changyou. 

Sohu's portal business is also going the wrong way. Brand advertising revenue of $141 million was 5% less than it was a year earlier. It experienced declines in its real estate and 17171 advertising businesses, but even Sohu Video has been stagnant, a problematic sight given the general popularity of video streaming in China. 

This leaves Sogou -- China's third most popular search engine -- as the subsidiary carrying the load. Search and search-related revenue soared 39% since the prior year to clock in at $166 million. 

Three months ago, Sogou was just behind gaming and brand advertising in terms of Sohu revenue. In a single quarter it has passed the other two subsidiaries. Search is now the leading revenue source for Sohu.

It wasn't enough to get Sohu into the black. The Chinese dot-com pioneer posted an adjusted loss of $0.34 a share. 

As bad as the the quarter may seem, Sohu actually landed ahead of its earlier outlook calling for $435 million to $465 million in revenue. The stock has still moved lower in back-to-back days since Monday morning's report, held back by Sohu's problematic guidance for the current period. 

Sohu is bracing for another quarterly deficit. It's also looking for just $390 million to $420 million in revenue. Sohu sees more declines in brand advertising and gaming, but even Sogou's top-line stride is expected to decelerate. Sohu has historically been conservative in its guidance, but its setting the bar too low this time around. 

There won't be a lot of crying at Sohu. It is armed with $1.42 billion in cash, something that will come in handy if it decides to buy its way out of its organic growth rut. It wasn't a great quarter -- and the current quarter won't get any prettier -- but Sohu has the means to wait out a turnaround. 


Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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