omniture

SOHU.COM Reports Third Quarter 2007 Unaudited Financial Results

Sohu.com Inc.
2007-10-30 04:44 1160

-- Third Quarter 2007 Brand Advertising Revenues Reach US$29.8 million,

Exceeding Guidance and Up 42% Year-on-Year;

-- Third Quarter 2007 Online Games Revenues Reach US$12.7 million, Up

473% Year-on-Year;

-- Third Quarter 2007 Total Revenues Reach US$51.5 million, Exceeding

High End of Guidance by US$4.5 million, Up 46% Year-on-Year;

-- Third Quarter 2007 Non-GAAP Fully Diluted EPS of US$0.30, Exceeding

High End of Guidance by 3 US Cents

BEIJING, Oct. 29 /Xinhua-PRNewswire-FirstCall/ -- Sohu.com Inc. (Nasdaq: SOHU), China's leading online media, communications, search, online gaming and mobile value-added services company, today reported unaudited financial results for the third quarter ended September 30, 2007.

Third Quarter Highlights

-- Record high total revenues and record high for each revenue category:

brand advertising, advertising, and non-advertising revenues as well

as non-GAAP net income. All such operating parameters exceed company

guidance.

-- Brand advertising revenues of US$29.8 million, up 42% year-on-year

and 12% quarter-on-quarter.

-- Advertising revenues of US$31.5 million, up 32% year-on-year and 11%

quarter-on-quarter.

-- Online games revenues of US$12.7 million, up 473% year-on-year and

232% quarter-on-quarter. In-house developed massive multiplayer

online role-playing game Tian Long Ba Bu (TLBB) solidified its

success with revenue up 384% quarter-on-quarter to US$10.9 million.

-- Non-advertising revenues of US$20.0 million, up 74% year-on-year and

88% quarter-on-quarter.

-- Total revenues of US$51.5 million, up 46% year-on-year and 32%

quarter-on-quarter, exceeding company guidance by US$4.5 million.

-- Non-GAAP net income (i.e. excluding share-based compensation

expenses) of US$11.7 million or US$0.30 per fully diluted share,

exceeding company guidance by 3 US cents. Non-GAAP net income

increased 37% year-on-year and 44% quarter-on-quarter.

-- GAAP net income of US$9.7 million or US$0.25 per fully diluted share.

GAAP net income increased 47% year-on-year and 70% quarter-on-quarter.

-- Explanation of the Company’s non-GAAP financial measures and the

related reconciliations to GAAP financial measures are included in

the accompanying "Non-GAAP Disclosure" and the "Reconciliations to

Unaudited Condensed Consolidated Statements of Operations."

Dr. Charles Zhang, Chairman and CEO of Sohu.com, stated, "I am very pleased to report another outstanding quarter with record total revenues and non-GAAP earnings. We have exceeded all of our guidance for each of our revenue categories as well as earnings. This set of results are made possible only because of our focus on technology and our long-term vision, such as our investment in our first in-house developed online game Tian Long Ba Bu and our Beijing 2008 Olympics sponsorship. Our other technological initiatives, including Sohu 3.0 launched during late July, Sogou Pinyin, are all progressing well. Our unmatched reporting on the "One Year Countdown to Beijing 2008 Olympics" and successful rehearsal to "Olympic Torch Relay Cross Mount Everest" through on-site reporting at the 6178 meters high Yuzhu Mountain during the National Day Holiday, have further solidified our undisputed position as the "Portal of Choice for the Beijing Olympics"."

Ms. Belinda Wang, Co-President and Chief Marketing Office of Sohu.com, said, "Fueled by the fast growth of China economy and continued migration of advertisers from offline to online, our brand advertising business continues to ride the tide of a robust market, especially with the Beijing 2008 Olympic Games now less than ten months away. In the third quarter, we delivered record high brand advertising revenue of $29.8 million, representing 42% year-on-year growth. For the first nine months of 2007, brand advertising revenue grew by 40% year-on-year, despite a challenging comparison to 2006 with the FIFA World Cup."

Dr. Gong Yu, Chief Operating Officer of Sohu.com, added, "On the content side, with increased broadband penetration and continuous improvement of peer-to-peer streaming technology, online video content is now in even higher demand from Internet users. To expand our video services, we have launched a new "TV channel" through strategic partnerships with 49 television stations. Programs from these TV stations are now streamed on Sohu. Such TV clips are nicely integrated into our text-based content and have been well received by our users."

Third Quarter Financial Results

Total revenues for third quarter ended September 30, 2007 were US$51.5 million, compared to revenues of US$39.0 million for second quarter ended June 30, 2007, and US$35.4 million for third quarter ended September 30, 2006.

Gross margin of 67% in third quarter of 2007 increased from 61% in the previous quarter and 64% in the same period of 2006. Non-GAAP gross margin was 67% in the third quarter of 2007, up from 62% in the previous quarter and 65% in the same period of 2006. The gross margin expansion was primarily due to the contribution from TLBB.

Net income for third quarter of 2007 was US$9.7 million or US$0.25 per fully diluted share. Non-GAAP net income for third quarter of 2007 was US$11.7 million or US$0.30 per fully diluted share. This compares to non-GAAP net income of US$8.1 million or US$0.21 per fully diluted share for second quarter of 2007 and US$8.5 million or US$0.22 per fully diluted share for third quarter of 2006.

Advertising revenues for third quarter of 2007 totaled US$31.5 million, an 11% quarter-on-quarter increase and a 32% year-on-year increase. Advertising revenues, consisting of US$29.8 million in brand advertising and US$1.7 million in sponsored search, accounted for 61% of total revenues in the third quarter of 2007. Brand advertising revenues for third quarter of 2007 increased 12% quarter-on-quarter and 42% year-on-year. Sponsored search revenues for third quarter of 2007 were flat quarter-on-quarter and decreased 39% year-on-year. Advertising gross margin for third quarter of 2007 was 63%, up from 62% for the previous quarter and down from 69% in the third quarter of 2006. Non-GAAP advertising gross margin for third quarter of 2007 was 64%, flat with the previous quarter and down from 71% in the third quarter of 2006. The year-on-year decrease was mainly due to increased content costs, bandwidth and server depreciation expenses.

For the third quarter of 2007, Sohu's non-advertising revenues, which are derived mainly from online games and wireless value-added services, were US$20.0 million, representing 39% of total revenues. Online games revenues for third quarter of 2007 increased 232% quarter-on-quarter and 473% year-on-year. Wireless revenue increased 4% quarter-on-quarter and decreased 23% year-on-year. Non-advertising gross margin was 72%, compared to 56% in the previous quarter and 54% in third quarter of 2006. Non-GAAP non-advertising gross margin was 72%, compared to 56% in the previous quarter and 54% in third quarter of 2006. Those increases were due to the contribution from TLBB.

For third quarter of 2007, Sohu's operating expenses totaled US$25.6 million. Non-GAAP operating expenses totaled US$23.9 million, an increase of 43% from the previous quarter and up 58% year-on-year. The increase was primarily due to continued investment in product development and Sohu branding, marketing expenses for TLBB and Sohu 3.0, as well as an increase in bonuses to reward employees for their contribution to good results.

In third quarter 2007, Sohu disposed its equity interest in an associated company, resulted in a gain of $0.6 million.

As of September 30, 2007, subsequent to the redemption of its zero coupon convertible senior notes of $58.5 million in July 2007, Sohu's balance of cash, cash equivalents and investments in marketable debt securities remained at a comfortable level of US$76.9 million, compared to US$113.1 million and US$129.7 million as of June 30, 2007 and December 31, 2006, respectively.

Ms. Carol Yu, Co-President and CFO of Sohu.com, commented, "Management's focus on technology and long-term vision over the last few years have started to pay off. Investments in our in-house developed game, Tian Long Ba Bu, our Olympic sponsorship and our stock repurchase programs (under which we repurchased 2.9 million shares since 2004, at an average price of US$18.2) have now been proven to be decisions that contribute to the long-term benefit of the Company and to the enhancement of shareholder value."

Business Outlook

Sohu estimates total revenues for the fourth quarter 2007 to be between US$53.5million to US$55.5 million, with advertising revenues of US$31 million to US$32 million and non-advertising revenues of US$22.5 million to US$23.5 million. Sohu estimates brand advertising revenues for the fourth quarter of 2007 to be between US$29.5 million to US$30.5 million.

Sohu estimates non-GAAP fully diluted earnings per share for the fourth quarter of 2007 to be between US$0.33 and US$0.35.

Assuming no new grants of share-based awards, Sohu estimates share-based compensation expense for the fourth quarter of 2007 to be between US$1.8 million and US$1.9 million. The estimated impact of this expense is expected to reduce Sohu’s fully diluted earnings per share for the fourth quarter of 2007, under US GAAP, by US$0.05.

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 cost of revenues, operating expenses, net income and net income per share, which are adjusted from results based on GAAP to exclude the compensation cost of share-based awards granted to employees under Statement of Financial Accounting Standard 123R, effective from January 1, 2006. 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 share-based compensation expense from its non-GAAP financial measure is useful for itself and investors. Further, the amount of share-based compensation expense 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 share-based compensation expense 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, the monthly financial results for internal reporting and any performance measure for commission and bonus are based on non-GAAP financial measures that exclude share-based compensation expense.

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

Notes to Financial Information

Financial information in this press release other than the information indicated as being non-GAAP is extracted from Sohu's unaudited financial statements prepared in accordance with generally accepted accounting principles in the United States.

On June 20, 2006, Sohu discontinued its own e-commerce platform of physical consumer goods. While processing the disposal of its e-commerce business, Sohu is reporting the related business activities as discontinued operations. Sohu's income statement separates out discontinued operations for both current and prior periods in order to focus on continuing operations and provide a consistent basis for comparing financial performance over time.

In those quarters prior to April 1, 2007, most of costs and expenses for the game department were related to product development and research. Accordingly, Sohu recorded all such costs and expenses in product development expenses in its statements of operations. Beginning April 1, 2007, in order to better present operation results to enhance comparability with industry peers, Sohu reclassified expenses in related to game operations, mainly salary and benefits of game masters, from product development expense to cost of online game revenues. To conform with current period presentations, the relevant amounts for prior periods have been reclassified. Such reclassification amounted to US$296,000 for the three months ended September 30, 2006, and amounted to US$938,000 for the nine months ended September 30, 2006.

Safe Harbor Statement

This announcement contains forward-looking statements. It is currently expected 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 our 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 uncertain regulatory landscape in the People's Republic of China, fluctuations in Sohu’s quarterly operating results, Sohu's historical and possible future losses and limited operating history, and the company'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, 2006, and other filings with the Securities and Exchange Commission.

Conference Call and Webcast

Sohu's management team will host a conference call today at 8:00 P.M. ET, October 29, 2007 (or 8:00 A.M., October 30, 2007 Beijing/Hong Kong time). To listen to the conference call, please use the dial in numbers below:

USA Toll Number: +1-800-867-0448

International: +1-303-262-2141

A replay of the call will be available for two weeks following the call and can be accessed by dialing the numbers below:

USA Toll Number: +1-800-405-2236

International: +1-303-590-3000

PASSCODE: 11099353#

The conference call will be available on webcast live and available for replay 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 http://www.sohu.com; interactive search engine http://www.sogou.com; #1 online alumni club http://www.chinaren.com; #1 games information portal http://www.17173.com; the top real estate website www.focus.cn; wireless value-added services provider http://www.goodfeel.com.cn; and leading online mapping service provider http://www.go2map.com.

Sohu corporate services consist of brand advertising on its matrix of websites as well as paid listing and bid listing on its in-house developed search directory and engines. Sohu also offers two types of consumer services. The company operates two massive multi-player online role-playing games, namely Tian Long Ba Bu and Blade Online, and a casual game platform. Sohu also offers wireless value-added services such as news, information, music, ringtone and picture content sent over mobile phones. Sohu.com, established by Dr. Charles Zhang, one of China's Internet pioneers, is in its eleventh year of operation.

-- TABLES FOLLOW --

SOHU.COM INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

Three Months Ended Nine Months Ended

Sep. 30, Jun. 30, Sep. 30, Sep. 30, Sep. 30,

2007 2007 2006 2007 2006

Revenues:

Advertising

Brand advertising $ 29,781 $ 26,632 $ 21,024 $ 79,940 $ 57,003

Sponsored search 1,745 1,747 2,852 5,578 9,828

Subtotal of

advertising revenues 31,526 28,379 23,876 85,518 66,831

Non-advertising

Online game 12,693 3,825 2,214 18,135 6,421

Wireless 6,832 6,588 8,839 18,996 5,842

Others 467 196 469 943 792

Subtotal of non-

advertising revenues 19,992 10,609 11,522 38,074 33,055

Total revenues 51,518 38,988 35,398 123,592 99,886

Cost of revenues:

Advertising

Brand advertising

(includes share-

based compensation

expense under SFAS

123(R) of $382, $415,

$403, $1,209 and

$1,006, respectively) 10,253 9,287 6,181 27,684 16,122

Sponsored search

(includes share-based

compensation expense

under SFAS 123(R) of

$9, $22, $24, $50 and

$68, respectively 1,330 1,383 1,221 4,291 3,560

Subtotal of

advertising cost of

revenues 11,583 10,670 7,402 31,975 19,682

Non-advertising

Online game (includes

Stock-based

compensation expense

under SFAS 123 (R) of

$3, $15, $19, $34 and

$56, respectively) 2,078 1,401 1,006 4,348 3,041

Wireless 3,311 3,175 4,104 9,096 12,380

Others (includes

share-based

compensation expense

under SFAS 123(R) of

$2, $4, $5, $10 and

$15, respectively) 178 132 200 409 425

Subtotal of non-

advertising cost

of revenues 5,567 4,708 5,310 13,853 15,846

Total cost of

revenues 17,150 15,378 12,712 45,828 35,528

Gross profit 34,368 23,610 22,686 77,764 64,358

Operating expenses:

Product development

(includes share-based

compensation expense

under SFAS 123(R)

of $672, $741, $476,

$2,193 and $1,301,

respectively) 6,875 5,494 4,741 17,048 12,959

Sales and marketing

(includes share-based

compensation expense

under SFAS 123(R) of

$337, $438, $445,

$1,222 and $1,191,

respectively) 13,573 9,457 7,236 30,320 20,643

General and

administrative

(includes share-based

compensation expense

under SFAS 123(R) of

$616, $761, $563,

$2,183 and $1,300,

respectively) 4,900 3,414 4,094 11,672 10,369

Amortization of

intangibles 202 310 509 891 1,527

Total operating

expenses 25,550 18,675 16,580 59,931 45,498

Operating profit 8,818 4,935 6,106 17,833 18,860

Other income (expense) 575 (120) (78) 335 565

Interest income 608 1,057 951 2,434 2,267

Income before income

tax expense 10,001 5,872 6,979 20,602 21,692

Income tax expense (322) (163) (351) (767) (1,097)

Income from

continuing operations 9,679 5,709 6,628 19,835 20,595

Minority interests 12 18 -- 42 --

Net income from

continuing operations 9,691 5,727 6,628 19,877 20,595

Loss from discontinued

E-commerce operations (5) (20) (27) (18) (784)

Net Income $ 9,686 $ 5,707 $ 6,601 $ 19,859 $ 19,811

Basic net income

per share $ 0.26 $ 0.15 $ 0.18 $ 0.54 $ 0.54

Shares used in

computing basic

net income per

share 37,307 36,903 36,640 36,979 36,783

Diluted net income

per share $ 0.25 $ 0.15 $ 0.17 $ 0.52 $ 0.52

Shares used in

computing diluted

net income per share 38,516 39,130 38,787 38,879 39,214

SOHU.COM INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

As of Sep. 30, As of Dec. 31,

2007 2006

(Unaudited) (Audited)

ASSETS

Cash, cash equivalents and

investments in

marketable debt securities $76,890 $129,698

Accounts receivable, net 34,858 23,825

Prepaid and other current assets 8,450 5,961

Fixed assets, net 61,772 21,453

Goodwill 55,537 54,986

Intangible assets, net 7,475 8,360

Restricted cash 4,281 4,774

Other assets, net 2,584 4,534

$251,847 $253,591

LIABILITIES AND SHAREHOLDERS’ EQUITY

Accounts payable and accrued

liabilities $55,489 $37,795

Zero coupon convertible senior notes 1,256 59,780

Total liabilities 56,745 97,575

Minority interests 12 53

Shareholders' equity 195,090 155,963

$251,847 $253,591

SOHU.COM INC.

RECONCILIATIONS TO UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NON-GAAP NET INCOME EXCLUDING SHARE-BASED COMPENSATION EXPENSE

Three Months Ended Sep. 30, 2007

Non-GAAP

GAAP Adjustments Non-GAAP

Advertising revenues $31,526 $-- $31,526

Less: Cost of advertising revenues 11,583 (391)(a) 11,192

Advertising gross profit $19,943 $391 $20,334

Advertising gross margin 63% 64%

Non-advertising revenues $19,992 $-- $19,992

Less: Cost of non-advertising

revenues 5,567 (5)(a) 5,562

Non-advertising gross profit $14,425 $5 $14,430

Non-advertising gross margin 72% 72%

Total revenues $51,518 $-- $51,518

Less: Total cost of revenues 17,150 (396) (a) 16,754

Gross profit $34,368 $396 $34,764

Gross margin 67% 67%

Operating expenses $25,550 $(1,625) (a) $23,925

Net income $9,686 $2,021 $11,707

Diluted net income per share $0.25 $0.30

Shares used in computing diluted net

income per share 38,516 38,882

Three Months Ended Jun. 30, 2007

Non-GAAP

GAAP Adjustments Non-GAAP

Advertising revenues $28,379 $-- $28,379

Less: Cost of advertising revenues 10,670 (437)(a) 10,233

Advertising gross profit $17,709 $437 $18,146

Advertising gross margin 62% 64%

Non-advertising revenues $10,609 $-- $10,609

Less: Cost of non-advertising

revenues 4,708 (19)(a) 4,689

Non-advertising gross profit $5,901 $19 $5,920

Non-advertising gross margin 56% 56%

Total revenues $38,988 $-- $38,988

Less: Total cost of revenues 15,378 (456)(a) 14,922

Gross profit $23,610 $456 $24,066

Gross margin 61% 62%

Operating expenses $18,675 $(1,940)(a) $16,735

Net income $5,707 $2,396 $8,103

Diluted net income per share $0.15 $0.21

Shares used in computing diluted net

income per share 39,130 39,675

Three Months Ended Sep. 30, 2006

Non-GAAP

GAAP Adjustments Non-GAAP

Advertising revenues $23,876 $-- $23,876

Less: Cost of advertising revenues 7,402 (427)(a) 6,975

Advertising gross profit $16,474 $427 $16,901

Advertising gross margin 69% 71%

Non-advertising revenues $11,522 $-- $11,522

Less: Cost of non-advertising

revenues 5,310 (24) (a) 5,286

Non-advertising gross profit $6,212 $24 $6,236

Non-advertising gross margin 54% 54%

Total revenues $35,398 $-- $35,398

Less: Total cost of revenues 12,712 (451)(a) 12,261

Gross profit $22,686 $451 $23,137

Gross margin 64% 65%

Operating expenses $16,580 $(1,484)(a) $15,096

Net income $6,601 $1,935 $8,536

Diluted net income per share $0.17 $0.22

Shares used in computing diluted

net income per share 38,787 39,370

SOHU.COM INC.

RECONCILIATIONS TO UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NON-GAAP NET INCOME EXCLUDING SHARE-BASED COMPENSATION EXPENSE

Nine Months Ended Sep. 30, 2007

Non-GAAP

GAAP Adjustments Non-GAAP

Advertising revenues $85,518 $-- $85,518

Less: Cost of advertising revenues 31,975 (1,259)(a) 30,716

Advertising gross profit $53,543 $1,259 $54,802

Advertising gross margin 63% 64%

Non-advertising revenues $38,074 $-- $38,074

Less: Cost of non-advertising

revenues 13,853 (44)(a) 13,809

Non-advertising gross profit $24,221 $44 $24,265

Non-advertising gross margin 64% 64%

Total revenues $123,592 $-- $123,592

Less: Total cost of revenues 45,828 (1,303)(a) 44,525

Gross profit $77,764 $1,303 $79,067

Gross margin 63% 64%

Operating expenses $59,931 $(5,598)(a) $54,333

Net income $19,859 $6,901 $26,760

Diluted net income per share $0.52 $0.69

Shares used in computing diluted net

income per share 38,879 39,381

Nine Months Ended Sep. 30, 2006

Non-GAAP

GAAP Adjustments Non-GAAP

Advertising revenues $66,831 $-- 66,831

Less: Cost of advertising revenues 19,682 (1,074)(a) 18,608

Advertising gross profit $47,149 $1,074 $48,223

Advertising gross margin 71% 72%

Non-advertising revenues $33,055 $-- $33,055

Less: Cost of non-advertising

revenues 15,846 (71)(a) 15,775

Non-advertising gross profit $17,209 $71 $17,280

Non-advertising gross margin 52% 52%

Total revenues $99,886 $-- $99,886

Less: Total cost of revenues 35,528 (1,145)(a) 34,383

Gross profit $64,358 $1,145 $65,503

Gross margin 64% 66%

Operating expenses $45,498 $(3,792)(a) $41,706

Net income $19,811 $4,937 $24,748

Diluted net income per share $0.52 $0.64

Shares used in computing diluted net

income per share 39,214 39,511

Note:

(a) To eliminate share-based compensation expense as measured using the

fair value method under SFAS 123(R).

Source: Sohu.com Inc.
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