Sohu.com Inc. Reports Operating Results (10-Q)

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Aug 07, 2009
Sohu.com Inc. (SOHU, Financial) filed Quarterly Report for the period ended 2009-06-30.

Sohu.com Inc. is a leading Internet portal in China in terms of brand recognition page views and registered users. The company\'s portal consists of the following: Chinese language Web navigational and search capabilities twelve main content channels Web-based communications and community services and a platform for e-commerce services. The company is well positioned to capitalize on the emergence of the Web as a new advertising medium and commerce platform in China. Sohu.com Inc. has a market cap of $2.46 billion; its shares were traded at around $64.21 with a P/E ratio of 14.9 and P/S ratio of 5.7.

Highlight of Business Operations:

cards and unused balances of activated prepaid game cards in an inactive account amounting to approximately $33,000 and $40,000, respectively. For the six months ended June 30, 2009 and 2008, we recognized revenues in connection with expired un-activated prepaid game cards and unused balances of activated prepaid game cards in an inactive account amounting to approximately $64,000 and $78,000, respectively.

Our wireless and others revenues are mainly from our wireless business. Wireless revenues are derived from providing short messaging services (SMS), Ring Back Tone (RBT), Wireless Application Protocol (WAP), multimedia messaging services (MMS) and interactive voice response (IVR), mainly consisting of news, weather forecast, chatting, entertainment information, ring tones, and logo downloads and various other mobile related products provided to mobile phone users. Wireless service fees are charged on a monthly or per message/download basis. Wireless revenues and cost of revenues are recognized in the month in which the service is performed, provided no significant obligations remain. We rely on mobile network operators in China to bill mobile phone users for wireless service fees. In order to meet ownership requirements under PRC law which restrict or prohibit wholly foreign-owned enterprises from providing Internet information and value-added telecommunication services such as wireless, we rely on Sohu Internet and Goodfeel to contract with the mobile network operators. Generally, (i) within 15 to 120 days after the end of each month, Sohu Internet or Goodfeel receives statements from each of the operators confirming the amount of wireless service charges billed to that operators mobile phone users and (ii) within 30 to 180 days after delivering monthly statements, each operator remits the wireless service fees, net of its service fees, for the month to Sohu Internet or Goodfeel. In order to recognize revenue and be paid for services provided, we rely on billing confirmations from the mobile network operators as to the actual amount of services they have billed to their mobile customers. We are unable to collect certain wireless services fees from an operator in certain circumstances due to technical issues with the operators network. This is referred to as the failure rate, which can vary from operator to operator. Recently, the time lag in receiving monthly statements from one of the mobile network operators has increased. At the end of each reporting period, where an operator has not provided Sohu Internet or Goodfeel with the monthly statements for any month confirming the amount of wireless service charges billed to that operators mobile phone users for the month, we, using information generated from our own internal system and historical data, make estimates of the failure rate and collectable wireless service fees and accrue revenue accordingly. The quarterly historical differences in our estimated revenue which was recorded in the financial statements compared to the actual revenue have ranged from an underestimation of $1,419,000 (gross margin underestimate of $654,000) to an overestimation of $340,000 (gross margin overestimate of $171,000) since 2002 when wireless revenues began representing a significant portion of our total revenues. We believe we have the ability to make a reasonable estimate. However, differences between the actual failure rate and bad debt rate per an operators statement and our internal estimates could result in material differences in the amount and timing of our revenue and cost of non-advertising revenue for any period. For the three months ended June 30, 2009, 56% of our estimated wireless revenues were confirmed by the monthly statements received from the mobile network operators.

Total revenues were $127.1 million and $242.8 million for the three and six months ended June 30, 2009, respectively, as compared to $102.0 million and $186.8 million for the corresponding periods in 2008.

Advertising revenues were $45.4 million and $86.0 million, or 36% and 35% of total revenues, for the three and six months ended June 30, 2009, as compared to $43.4 million and $78.1 million, or 43% and 42% of total revenues, for the corresponding periods in 2008. For the three and six months ended June 30, 2009, advertising revenues consisted of revenues from brand advertising of $43.6 million and $82.7 million, and revenues from sponsored search of $1.8 million and $3.3 million. For the three and six months ended June 30, 2008, advertising revenues consisted of revenues from brand advertising of $41.7 million and $74.8 million, and revenues from sponsored search of $1.7 million and $3.3 million.

Brand advertising revenues increased by $1.9 million to $43.6 million for the three months ended June 30, 2009 and increased by $7.9 million to $82.7 million for the six months ended June 30, 2009 as compared to the corresponding periods in 2008. The increase of $1.9 million for the three months ended June 30, 2009 from the corresponding period in 2008 consisted of: (i) a $15.3 million increase from advertisers who advertised with us during the three months ended June 30, 2009 but did not advertise on our Website during the three months ended June 30, 2008; (ii) a $4.7 million decrease in revenues from advertisers who advertised with us in the three months ended June 30, 2008 and continued to do so in the three months ended June 30, 2009; and (iii) a $8.7 million decrease in revenues as some of advertisers who advertised with us during the three months ended June 30, 2008 did not advertise on our Website during the three months ended June 30, 2009. The increase of $7.9 million for the six months ended June 30, 2009 from the corresponding period in 2008 consisted of: (i) a $19.9 million increase from advertisers who advertised with us during the six months ended June 30, 2009 but did not advertise on our Website during the six months ended June 30, 2008; (ii) a $2.1 million increase in revenues from advertisers who advertised with us in the six months ended June 30, 2008 and continued to do so in the six months ended June 30, 2009; and (iii) a $14.1 million decrease in revenues as some of advertisers who advertised with us during the six months ended June 30, 2008 did not advertise on our Website channels during the six months ended June 30, 2009. As of June 30, 2009 and 2008, we had $1.3 million and $2.1 million, respectively, of receipts in advance from advertisers. We do not enter into advertising-for-advertising barter transactions.

For the three months ended June 30, 2009, online game revenues increased by $18.7 million to $66.6 million as compared to $47.9 million for the three months ended June 30, 2008. For the six months ended June 30, 2009, online game revenues increased by $39.3 million to $128.2 million as compared to $88.9 million for the six months ended June 30, 2008.

Read the The complete ReportSOHU is in the portfolios of Sarah Ketterer of CAUSEWAY CAPITAL MANAGEMENT LLC.