Sohu.com Reports Second Quarter 2012 Unaudited Financial Results

BEIJING, August 6, 2012 /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 second quarter ended June 30, 2012.

Second Quarter Highlights

• Total revenues were US$256 million, up 29% year-over-year and 13% quarter-over-quarter.
• Brand advertising revenues were US$69 million, up 2% year-over-year and 14% quarter-over-quarter.
• Sogou[1] revenues were US$30 million, up 123% year-over-year and 34% quarter-over-quarter.
• Online game revenues reached quarterly record high of US$137 million, up 35% year-over-year and 8% quarter-over-quarter.
• GAAP net income attributable to Sohu.com Inc. was US$11 million, or US$0.28 per fully diluted share. Non-GAAP net income attributable to Sohu.com Inc. was US$16 million, or US$0.42 per fully diluted share.

Dr. Charles Zhang, Chairman and CEO of Sohu.com Inc. commented, "We had a solid second quarter with total revenues rising nearly 30% from last year, despite challenges faced in our brand advertising business. As China's economic growth continued to decelerate and we initiated some operational transitions in our online video business, revenues from brand advertising recorded only a low single-digit year-on-year increase."

Dr. Zhang added, "But overall, we are pleased with our performance at the group level as our search and online game segments both remained on a solid upward path. For search, Sogou again posted triple-digit revenue growth on a year-over-year basis. Our online game subsidiary Changyou achieved record results at both the top and bottom-line, supported by strong performance from its MMO and web-based game franchises. We believe the blended results help demonstrate the resilience of our business mix and the benefit of having diversified operations."

Ms. Belinda Wang, Co-President and COO added, "The year 2012 is a critical year of transition for the Sohu Group. As we continue to make heavy but necessary investments across our strategically important business lines, we are confident to see a payoff in 2013. "

Second Quarter Financial Results

Revenues

Total revenues for the second quarter of 2012 were US$256 million, up 29% year-over-year and 13% quarter-over-quarter.

Total online advertising revenues, which include revenues from brand advertising and search and others businesses for the second quarter of 2012, were US$98 million, up 21% year-over-year and 19% quarter-over-quarter.

Brand advertising revenues for the second quarter of 2012 totaled US$69 million, up 2% year-over-year and 14% quarter-over-quarter.

Search and others revenues for the second quarter of 2012 were US$29 million, up 111% year-over-year and 33% quarter-over-quarter.

Online game revenues for the second quarter of 2012 were US$137 million, up 35% year-over-year and 8% quarter-over-quarter.

Wireless revenues for the second quarter of 2012 were US$16 million, up 34% year-over-year and 17% quarter-over-quarter.

Gross Margin

Both GAAP and non-GAAP gross margin was 61% for the second quarter of 2012, compared with 65% in the first quarter of 2012 and 73% in the second quarter of 2011.

Online advertising gross margin for the second quarter of 2012 was 32%, compared with 39% in the first quarter of 2012 and 59% in the second quarter of 2011. Non-GAAP online advertising gross margin for the second quarter of 2012 was 31%, compared with 40% in the first quarter of 2012 and 60% in the second quarter of 2011.

Brand advertising gross margin for the second quarter of 2012 was 26%, compared with 39% in the first quarter of 2012 and 63% in the second quarter of 2011. The year-over-year decrease in gross margin was primarily due to increases in content and bandwidth costs. The quarter-over-quarter decrease in gross margin was due to approximately $15 million impairment charges of video content we recognized in the second quarter of 2012. Non-GAAP brand advertising gross margin for the second quarter of 2012 was 26%, compared with 40% in the first quarter of 2012 and 64% in the second quarter of 2011.

Both GAAP and non-GAAP gross margin for search and others business in the second quarter of 2012 were 44%, compared with 39% in the first quarter of 2012 and 40% in the second quarter of 2011. The increase in margin was mainly due to higher revenues from online marketing services.

Both GAAP and non-GAAP gross margin for online games in the second quarter of 2012 were 87%, compared with 87% in the first quarter of 2012 and 90% in the second quarter of 2011.

Both GAAP and non-GAAP gross margin for the wireless business for the second quarter of 2012 were 35%, compared with 34% in the first quarter of 2012 and 39% in the second quarter of 2011. The year-over-year decrease was primarily due to increased revenue share with partners.

Operating Expenses

For the second quarter of 2012, operating expenses totaled $113 million, up 49% year-over-year and 19% quarter-over-quarter. Non-GAAP operating expenses were $106 million, up 48% year-over-year and 15% quarter-over-quarter. The increase in operating expenses was primarily due to an increase in the number of employees, higher salaries and benefits expense and an increase in marketing expense in the second quarter of 2012.

Operating Profit

Operating profit for the second quarter of 2012 was US$43 million, down 37% year-over-year and 17% quarter-over-quarter. Operating margin was 17% for the second quarter of 2012, compared with 23% in the previous quarter and 35% in the second quarter of 2011.

Non-GAAP operating profit for the second quarter of 2012 was US$49 million, down 32% year-over-year and 10% quarter-over-quarter. Non-GAAP operating margin was 19% for the second quarter of 2012, compared with 24% in the previous quarter and 37% in the second quarter of 2011.

Income Tax Expense

For the second quarter of 2012, GAAP income tax expense was US$18.5 million. Excluding a non-cash income tax expense of US$1.5 million recorded for the utilization of tax benefits from excess tax deductions related to share-based awards and deferred tax liability impact on intangible asset impairment of US$0.6 million, non-GAAP income tax expense was US$17.6 million, compared with US$17.6 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 second quarter of 2012 was US$34 million, down 45% year-over-year and 17% quarter-over-quarter. Non-GAAP net income for the second quarter of 2012 was US$41 million, down 39% year-over-year and 9% quarter-over-quarter.

GAAP net income attributable to Sohu.com Inc. for the second quarter of 2012 was US$11 million, or US$0.28 per fully diluted share. Non-GAAP net income attributable to Sohu.com Inc. for the second quarter of 2012 was US$16 million, or US$0.42 per fully diluted share, down 65% year-over-year and 31% quarter-over-quarter.

Cash Balance

Sohu Group continued to maintain a debt-free balance sheet and a cash position of US$765 million as of June 30, 2012.

Ms. Carol Yu, Co-President and CFO of Sohu.com Inc. commented, "With our strong balance sheet and resilient business mix, Sohu Group is able to make long-term investments for the businesses we believe that have bright prospects. Our determination is unaffected by business cycles and short-term factors, and will eventually maximize returns to shareholders."

Recent development

Changyou.com Declares US$3.8 Special Cash Dividend per American Depositary Share

On August 6, 2012, Changyou.com Limited (NASDAQ: CYOU), Sohu's online game subsidiary, announced that its board of directors declared a special one-time cash dividend of US$1.9 per Class A or Class B ordinary share, or US$3.8 per American Depositary Share ("ADS"). The total amount of the special cash dividend is approximately US$201 million.

Record holders of Changyou's Class A and Class B ordinary shares at the close of business U.S. Eastern Time on August 17, 2012 (the "Record Date") will be entitled to receive the special cash dividend. Holders of the Changyou's ADSs, each representing two Class A ordinary shares, as of the Record Date will be entitled to the special cash dividend. Changyou expects, Bank of New York Mellon, depositary bank for Changyou's ADR program, to pay out dividends to ADS holders on or before September 30, 2012.

The amount of the dividend to be received by Sohu is expected to be approximately $136 million. Sohu does not expect to pay any of such dividend it receives, or to pay any other dividends, to its shareholders in the foreseeable future.

For more information about the special Changyou dividend, please refer to Changyou's separate announcement.

Supplementary Information for Online Game Results

Second Quarter 2012 Operational Results

• Aggregate registered accounts for Changyou's games[2], excluding 7Road's games, increased 51% year-over-year and 6% quarter-over-quarter to 199.5 million.
• Aggregate peak concurrent users ("PCU") for Changyou's games, excluding 7Road's games, increased 11% year-over-year and were flat quarter-over-quarter to 1.08 million.
• Aggregate active paying accounts ("APA") for Changyou's games, excluding 7Road's games, decreased 10% year-over-year and 16% quarter-over-quarter to 2.61 million. The decreases reflected a decline in the number of low-spending active paying accounts that did not make a purchase in the second quarter of 2012 as a result of less in-game promotions and the give-away of virtual items in TLBB to celebrate the game's fifth year anniversary.
• Average revenue per active paying account ("ARPU") for Changyou's games, excluding 7Road's games, increased 31% year-over-year and 23% quarter-over-quarter to RMB277. The increase was mainly due to the decline in low-spending active paying accounts in the second quarter of 2012.

Business Outlook

For the third quarter of 2012, Sohu estimates:

• Total revenues to be between US$272 million and US$277 million.
• Brand advertising revenues to be between $76 million and $78 million; this implies a sequential increase of 10% to 13%, and flattish with the same period of last year to an annual increase of 2%. This includes revenues from 17173 of US$11 million to US$12 million, which implies a sequential increase of 21% to 32% and an annual increase of 14% to 24%.
• Sogou revenues to be around US$37 million; this implies a sequential increase of 22% and an annual growth of 101%.
• Online game revenues to be between US$141 million and US$144 million. This implies a sequential increase of 3% to 5% and represents an annual growth of 22% to 24%.
• Before deducting the share of non-GAAP net income pertaining to the Non-Controlling interest, non-GAAP net income to be between US$42 million and US$45 million.
• Non-GAAP net income attributable to Sohu.com Inc. to be between US$19 million and US$21 million, and non-GAAP fully diluted earnings per share to be between US$0.50 and US$0.55.
• Assuming no new grants of share-based awards, we estimate that compensation expenses and income tax expenses relating to share-based awards to be around US$4.5 million to US$5.5 million. The estimated impact of this expense is expected to reduce Sohu's fully diluted earnings per share for the third quarter of 2012 under US GAAP by 12 to 14 cents.

Non-GAAP Disclosure

Beginning in the fourth quarter of 2011, Sohu revised its non-GAAP reporting methodology to exclude income from reversal of contingent consideration, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact, in addition to its historical practice of excluding share-based awards from non-GAAP results.

To supplement the unaudited consolidated financial statements presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"), Sohu's management uses non-GAAP measures of gross profit, operating profit, income tax expense, net income attributable to Sohu.com.Inc. and net income attributable to Sohu.com.Inc. per share, which are adjusted from results based on GAAP to exclude the impact of share-based awards, which consist mainly of share-based compensation expenses and non-cash tax benefits from excess tax deductions related to share-based awards, income from the reversal of contingent considerations previously recorded for acquisitions and goodwill impairment and impairment of intangibles via acquisitions of businesses and the related tax impacts. 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, non-cash tax benefits from excess tax deductions related to share-based awards, income from reversal of contingent consideration, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact from its non-GAAP financial measure is useful for itself and investors. Further, the impact of share-based awards, utilization of non-cash tax benefits from excess tax deductions related to share-based awards, income from reversal of contingent consideration, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact 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, non-cash tax benefits from excess tax deductions related to share-based awards, income from reversal of contingent consideration, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact does not involve 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, non-cash tax benefits from excess tax deductions related to share-based awards, income from reversal of contingent consideration, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact.

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, operating profit, income tax expense, net income attributable to Sohu.com Inc. and net income attributable to Sohu.com Inc. per share, excluding the impact of share-based awards, non-cash tax benefits from excess tax deductions related to share-based awards, income from reversal of contingent consideration, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact is that the impact of share-based awards and non-cash tax benefits from excess tax deductions related to share-based awards have been and will continue to be a significant recurring expense in Sohu's business for the foreseeable future, income from reversal of contingent consideration, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact may recur in the 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, 2011, and other filings with the Securities and Exchange Commission.

Conference Call and Webcast

Sohu's management team will host a conference call on the same day at 8:30 a.m. U.S. Eastern Time, August 6, 2012 (8:30 p.m. Beijing/Hong Kong time, August 6, 2012) following the quarterly results announcement.

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 1:30 a.m. Eastern Time on August 7 through August 14, 2012. 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) has a diverse portfolio of online games that includes Tian Long Ba Bu, one of the most popular massively multi-player online ("MMO") games in China, and DDTank and Wartune (also known as Shen Qu), which are two popular web games in China.. Sohu.com, established by Dr. Charles Zhang, one of China's internet pioneers, is in its sixteen year of operation.

For investor and media inquiries, please contact:

In China:

In the United States:

[1] Sogou operates search and others business and offers Internet value-added services ("IVAS") with respect to Web games developed by third-party developers. Search and others business include search and Sogou Web Directory. In statements of operations, revenues from search and Sogou Web Directory are recorded as "search and others" revenue, and revenue from IVAS is recorded as "others" revenue.

[2] Excludes 7Road's games and comprises the following games operated in China: Tian Long Ba Bu ("TLBB"), Duke of Mount Deer ("DMD"), Blade Online, Blade Hero 2, Tao Yuan, Da Hua Shui Hu, Zhong Hua Ying Xiong, Immortal Faith, and Legend of Ancient World.

Note:

(a) To eliminate the impact of share-based awards as measured using the fair value method.

(b) Beginning in the fourth quarter of 2011, the Company revised its non-GAAP reporting methodology to exclude goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact, non-cash tax benefits from excess tax deductions related to share-based awards and income from the reversal of contingent consideration previously recorded for acquisitions, in addition to its historical practice of excluding share-based compensation expense from non-GAAP results. For the three months ended June 30, 2012, there were $2.9 million of impairment of intangibles via acquisitions of businesses. For the three months ended March 31, 2012, there were no goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact, non-cash tax benefits from excess tax deductions related to share-based awards and income from the reversal of contingent consideration previously recorded for acquisitions."

(c) To adjust non-cash tax benefits from excess tax deductions related to share-based awards.

(d) To adjust Sohu's economic interest in Changyou and Sogou under the treasury stock method and if-converted method, respectively.

(e) The classification of certain comparative figures of online advertising expenses has been changed to conform to the current period presentation.