Sohu.com Reports Third Quarter 2011 Unaudited Financial Results

BEIJING, October 31, 2011 /PRNewswire-Asia/ -- Sohu.com Inc. (NASDAQ: SOHU), China's leading online media, search, gaming, community and mobile service group, today reported unaudited financial results for the third quarter ended September 30, 2011.

Third Quarter Highlights(1)

• Record total revenues and record revenues in brand advertising, Sogou(2), and online game businesses.
• Total revenues were US$233 million, up 42% year-over-year and 17% quarter-over-quarter.
• Total online advertising revenues which include revenues from brand advertising and Sogou business were US$95 million, up 47% year-over-year and 17% quarter-over-quarter.
• Brand advertising revenues were US$77 million, up 30% year-over-year and 13% quarter-over-quarter.
• Sogou revenues were US$18.4 million, up 244% year-over-year and 35% quarter-over-quarter.
• Online game revenues reached US$116 million, up 35% year-over-year and 14% quarter-over-quarter.
• GAAP net income attributable to Sohu.com Inc. was US$45 million, up 17% year-over-year and 6% quarter-over-quarter or US$1.17 per fully diluted share. Non-GAAP net income attributable to Sohu.com Inc. was US$49 million, up 9% year-over-year and 3% quarter-over-quarter or US$1.26 per fully diluted share.

Dr. Charles Zhang, chairman and chief executive officer of Sohu.com commented, "I am pleased to report strong third quarter results with year-over-year revenue growth of 42%, driven by solid performance of our online advertising and online gaming businesses. For online advertising, two of the fastest growing areas, Sogou and Sohu video continued to deliver exciting news. Sogou's quarterly revenue grew 244% year-over-year, comfortably exceeding our prior guidance. Sohu video, for the first time, in September, both the number of visitors and total number of video viewed rose to the second place in China, according to Comscore."

Dr. Zhang added, "For online game, our online gaming subsidiary Changyou once again exceeded its top-line and bottom-line financial goals, while making planned investments in marketing and promotion of Duke of Mount Deer. Our flagship game Tian Long Ba Bu, or TLBB, continued to expand player numbers with the release of new expansion pack. Duke of Mount Deer, or DMD, appeals to hard-core game players with its new technologies and advanced cross-server game play."

Commenting on Sohu's brand advertising business, Ms. Belinda Wang, Co-President and COO added, "Third quarter revenue for brand advertising business hit a new high, driven by revenue increases from real estate and IT-related sectors. Online video segment posted about 110% growth in revenues on a year-over-year basis while the number of advertisers grew by nearly 50% from a year ago."

Third Quarter Financial Results

Revenues

Total revenues for the third quarter of 2011 were US$232.9 million, up 42% year-over-year and 17% quarter-over-quarter.

Total online advertising revenues for the third quarter of 2011 were US$95.0 million, up 47% year-over-year and 17% quarter-over-quarter.

Brand advertising revenues for the third quarter of 2011 totaled US$76.6 million, up 30% year-over-year and 13% quarter-over-quarter. The increases were mainly due to strong advertising demand from IT-related sector and increased revenues from real estate sector toward which Sohu built a larger sales network in 2011.

Sogou revenues for the third quarter of 2011 were US$18.4 million, up 244% year-over-year and 35% quarter-over-quarter. The increases were mainly due to increased search traffic and improved monetization of traffic.

Online game revenues for the third quarter of 2011 were US$115.8 million, up 35% year-over-year and 14% quarter-over-quarter.

Wireless revenues for the third quarter of 2011 were US$14.2 million, up 5% year-over-year and 22% quarter-over-quarter.

Gross Margin

Gross margin was 71% for the third quarter of 2011, compared with 73% in the second quarter of 2011 and 74% in the third quarter of 2010. Non-GAAP gross margin for the third quarter of 2011 was 71%, compared with 74% in the second quarter of 2011 and 74% in the third quarter of 2010.

Online advertising gross margin for the third quarter of 2011 was 59%, compared with 61% in the second quarter of 2011 and 58% in the third quarter of 2010. Non-GAAP online advertising gross margin for the third quarter of 2011 was 59%, compared with 61% in the second quarter of 2011 and 60% in the third quarter of 2010.

Brand advertising gross margin for the third quarter of 2011 was 59%, compared with 62% in the second quarter of 2011 and 61% in the third quarter of 2010. Non-GAAP brand advertising gross margin for the third quarter of 2011 was 59%, compared with 63% in the second quarter of 2011 and 62% in the third quarter of 2010. The year-over-year and quarter-over-quarter decreases in gross margin for brand advertising business was primarily due to the changes in amortization method of certain video content in the third quarter of 2011 to better match and reflect viewership accumulation pattern.

In the third quarter of 2011, we noted changes of the pattern of the benefits that we derive from some of our licensed video content as reflected by the accumulative viewership pattern. As a result, the amortization of such video content was accelerated. If the Company had continued amortizing the video content costs using the old method, about US$2 million less costs would have been recorded in the third quarter of 2011. The change was considered a change in accounting estimate effective in the third quarter of 2011 and therefore was applied prospectively.

Both GAAP and non-GAAP gross margin for Sogou in the third quarter of 2011 were 59%, compared with 55% in the second quarter of 2011 and 32% in the third quarter of 2010. This rise was primarily due to improved monetization as revenue growth outpaced the growth in total costs.

Both GAAP and non-GAAP gross margin for online games in the third quarter of 2011 were 87%, compared with 90% in the second quarter of 2011 and 90% in the third quarter of 2010.

Both GAAP and non-GAAP gross margin for the wireless business for the third quarter of 2011 were 39%, compared with 39% in the first quarter of 2011 and 46% in the third quarter of 2010.

Operating Expenses

For the third quarter of 2011, Sohu's operating expenses totaled US$92.3 million, up 66% year-over-year and 20% quarter-over-quarter. The increases in operating expenses were mainly due to increases in total headcount and higher expenses associated with marketing and promotion activities in the third quarter of 2011.

Operating Profit

Operating profit for the third quarter of 2011 was US$73.6 million, up 13% year-over-year and 7% quarter-over-quarter. Operating margin was 32% for the third quarter of 2011, compared with 35% in the previous quarter and 40% in the third quarter of 2010.

Non-GAAP operating profit for the third quarter of 2011 was US$78.0 million, up 9% year-over-year and 7% quarter-over-quarter. Non-GAAP operating margin was 33% for the third quarter of 2011, compared with 37% in the previous quarter and 44% in the third quarter of 2010.

Income Tax Expense

For the third quarter of 2011, GAAP income tax expense was US$14.4 million. Excluding a non-cash income tax expense of US$0.3 million recorded for tax benefits from share-based awards, non-GAAP income tax expense was US$14.1 million, compared with US$9.3 million in the previous quarter.

Net Income

Before deducting the share of net income pertaining to the Non-controlling Interest, GAAP net income for the third quarter of 2011 was US$64.3 million, up 19% year-over-year and 4% quarter-over-quarter. Non-GAAP net income for the third quarter of 2011 was US$69.0 million, up 13% year-over-year and 3% quarter-over-quarter, exceeding the high end of the Group's expectations.

GAAP net income attributable to Sohu.com Inc. for the third quarter of 2011 was US$45.3 million, or US$1.17 per fully diluted share. Non-GAAP net income attributable to Sohu.com Inc. for the third quarter of 2011 was US$49.0 million, or US$ 1.26 per fully diluted share, up 9% year-over-year and 3% quarter-over-quarter, exceeding the high end of the Group's expectations.

Cash Balance

Sohu Group continued to maintain a debt-free balance sheet and a strong cash position of US$707.4 million as of September 30, 2011.

Stock Purchase Program

On August 29, 2011, Sohu's board of directors authorized a combined share purchase program of up to US$100 million. As of September 30, 2011, Sohu had repurchased 250,000 Sohu's ordinary shares and purchased 750,000 Changyou's ADSs at an aggregated cost of approximately US$42.3 million under the share purchase program.

Ms. Carol Yu, Co-President and CFO of Sohu commented, "We are pleased to see that our investment in new businesses, especially Sogou and Sohu video, has paid off. Sohu's strong balance sheet and ample cash balances enable us to further grow and develop these businesses."

Supplementary Information for Online Game Results

Third Quarter 2011 Operational Results

• Aggregate registered accounts for Changyou's games(3), which exclude those of the Web-based games of Changyou's majority-owned subsidiary, Shenzhen 7Road Technology Co., Ltd. ("7Road"), increased 51% year-over-year and 21% quarter-over-quarter to 159.0 million.
• Aggregate peak concurrent users ("PCU") for Changyou's games, which exclude those of 7Road's Web-based games, increased 17% year-over-year and 19% quarter-over-quarter to 1,150,000.
• Aggregate active paying accounts ("APA") for Changyou's games, which exclude those of 7Road's Web-based games, increased 16% year-over-year and 4% quarter-over-quarter to 3,020,000.
• Average revenue per active paying account ("ARPU") for Changyou's games, which exclude those of 7Road's Web-based games, increased 2% year-over-year and 3% quarter-over-quarter to RMB218, which is consistent with Changyou's intention to have ARPU within a range that keeps Changyou's games affordable for the majority of Chinese game players.

Third Quarter 2011 Revenues

Online game revenues for the third quarter of 2011, which includes revenues from Changyou's game operations and overseas licensing revenues and revenues from 7Road, increased 35% year-over-year and 14% quarter-over-quarter to US$115.8 million. The increases were mainly due to a full quarter of revenue contribution from 7Road, revenue contribution from the newly launched DMD, and the ongoing popularity of TLBB in China during the third quarter of 2011.

Business Outlook

For the fourth quarter of 2011, Sohu expects:

• Total revenues to be between US$241 million and US$246 million.
• Brand advertising revenues to be between US$77 million and US$79 million. This implies sequential growth of 1% to 3%, and 28% to 32% year-over-year growth.
• Sogou revenues to be around US$21 million. This implies quarter-over-quarter growth of about 14% and year-over-year growth of about 218%.
• Total revenues from Changyou to be between US$122 million and US$125 million, including online game revenues of US$119 million to US$122 million.
• Before deducting the share of non-GAAP net income pertaining to the Non-controlling Interest, non-GAAP net income to be between US$70.5 million and US$73.5 million.
• Non-GAAP net income attributable to Sohu.com Inc. to be between US$50.5 million and US$52.5 million and non-GAAP fully diluted earnings per share to be between US$1.30 and US$1.35.
• Assuming no new grants of share-based awards, compensation expenses and income tax expenses relating to share-based awards to be around US$4 million to US$4.5 million. The estimated impact of this expense is expected to reduce Sohu's fully diluted earnings per share for the third quarter of 2011, under US GAAP, by 10 to 12 cents.

Non-GAAP Disclosure

To supplement the unaudited consolidated financial statements presented in accordance with United States Generally Accepted Accounting Principles ("GAAP"), Sohu's management uses non-GAAP measures of gross profit, gross margin, operating profit, operating margin, income tax expense, net income and net income per share, which are adjusted from results based on GAAP to exclude the impact of share-based awards granted to employees in the consolidated statements of operations, which consists mainly of share-based compensation expense and non-cash tax benefits from excess tax deductions related to share-based awards. These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results.

Sohu's management believes excluding the impact of share-based awards from its non-GAAP financial measure is useful for itself and investors. Further, the impact of share-based awards cannot be anticipated by management and business line leaders and these expenses were not built into the annual budgets and quarterly forecasts, which have been the basis for information Sohu provides to analysts and investors as guidance for future operating performance. As the impact of share-based awards does not involve any upfront or subsequent cash outflow, Sohu does not factor this in when evaluating and approving expenditures or when determining the allocation of its resources to its business segments. As a result, in general, the monthly financial results for internal reporting and any performance measure for commissions and bonuses are based on non-GAAP financial measures that exclude the impact of share-based awards.

The non-GAAP financial measures are provided to enhance investors' overall understanding of Sohu's current financial performance and prospects for the future. A limitation of using non-GAAP gross profit, gross margin, operating profit, operating margin, income tax expense, net income and net income per share, excluding the impact of share-based awards, is that the impact of share-based awards has been and will continue to be a significant recurring expense in Sohu's business for the foreseeable future. In order to mitigate these limitations Sohu has provided specific information regarding the GAAP amounts excluded from each non-GAAP measure. The accompanying tables include details on the reconciliation between the GAAP financial measures that are most directly comparable to the non-GAAP financial measures that have been presented.

Notes to Financial Information

Financial information in this press release other than the information indicated as being non-GAAP is derived from Sohu's unaudited interim financial statements prepared in accordance with GAAP.

Mezzanine Equity consists of non-controlling interests in 7Road and a put option that gives the non-controlling shareholders the right to put their shares to Changyou at a pre-determined price if 7Road achieves specified performance milestones before the expiry of the put option and certain other circumstances occur. The put option will expire in 2014. Non-controlling interests of 7Road and the put option are classified as mezzanine equity in Changyou's consolidated balance sheets, as redemption of the non-controlling interests is not solely within the control of Changyou.

In accordance with ASC subtopic 480-10, Changyou accretes the balance of non-controlling interests to its redemption value over the period from the date of the 7Road acquisition to the earliest exercise date of the put right. Any subsequent changes in the redemption value are considered to be changes in accounting estimates and are also recognized over the same period as net income attributable to mezzanine classified non-controlling interests.

Safe Harbor Statement

This announcement contains forward-looking statements. It is currently expected that the Business Outlook will not be updated until release of Sohu's next quarterly earnings announcement; however, Sohu reserves right to update its Business Outlook at any time for any reason. Statements that are not historical facts, including statements about Sohu's beliefs and expectations, are forward-looking statements. These statements are based on current plans, estimates and projections, and therefore you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Potential risks and uncertainties include, but are not limited to, the current global financial and credit markets crisis and its potential impact on the Chinese economy, the uncertain regulatory landscape in the People's Republic of China, fluctuations in Sohu's quarterly operating results, and Sohu's reliance on online advertising sales, online games and wireless services (most wireless revenues are collected from a few mobile network operators) for its revenues. Further information regarding these and other risks is included in Sohu's annual report on Form 10-K for the year ended December 31, 2010, and other filings with the Securities and Exchange Commission.

Conference Call and Webcast

Sohu's management team will host a conference call on October 31, 2011(8:30 p.m. Beijing/Hong Kong time, October 31, 2011) at 8:30 a.m. U.S. Eastern Time.

The dial-in details for the live conference call are:

Please dial in 10 minutes before the call is scheduled to begin and provide the passcode to join the call.

A telephone replay of the call will be available after the conclusion of the conference call at 11:30 a.m. Eastern Time on October 31 through November 7, 2011. The dial-in details for the telephone replay are:

The live webcast and archive of the conference call will be available on the Investor Relations section of Sohu's website at http://corp.sohu.com/.

About Sohu.com

Sohu.com Inc. (NASDAQ: SOHU) is China's premier online brand and indispensable to the daily life of millions of Chinese, providing a network of web properties and community based/web 2.0 products which offer the vast Sohu user community a broad array of choices regarding information, entertainment and communication. Sohu has built one of the most comprehensive matrices of Chinese language web properties and proprietary search engines, consisting of the mass portal and leading online media destination www.sohu.com; interactive search engine www.sogou.com; #1 games information portal www.17173.com; the top real estate website www.focus.cn; #1 online alumni club www.chinaren.com; wireless value-added services provider www.goodfeel.com.cn; leading online mapping service provider www.go2map.com; and developer and operator of online games www.changyou.com/en/.

Sohu corporate services consist of online brand advertising on its matrix of websites as well as bid listing and home page on its in-house developed search directory and engine. Sohu also offers wireless value-added services such as news, information, music, ringtone and picture content sent over mobile phones. Sohu's online game subsidiary, Changyou.com (NASDAQ: CYOU) and its subsidiaries currently operates over 10 online games that includes in-house developed MMORPGs, such as Tian Long Ba Bu, one of the most popular online games in China, and Duke of Mount Deer, as well as Web-based games such as DDTank. Sohu.com, established by Dr. Charles Zhang, one of China's internet pioneers, is in its fifteenth year of operation.