Sohu.com Inc. (SOHU) is set to report its first quarter 2010 results before the opening bell on Apr 26, 2010.
During the fourth quarter conference call, the company provided its first quarter guidance. For the first quarter of 2010, Sohu expects total revenue in the range of $123 million to $128 million, with advertising revenues within the $40 – $42 million range.
Brand advertising revenue is expected to be within $38 – $40 million and Online game revenues to be in the range of $70 – $73 million. Revenue forecast is much below our expectation due to delay in game launches and dismal advertising spending, which is yet to recover.
The company expects its net income on a non-GAAP basis after deducting the non-controlling interest in Changyou to be in the range of $31 million to $33 million, or 78 cents to 83 cents per share in the first quarter.
Estimate Revisions
The outlook for the first quarter was far below the Zacks Consensus Estimate of 97 cents per share when the company reported earnings. The negative sentiment is also reflected in recent analyst estimate revisions.
The current Zacks Consensus Estimate for the first quarter of 2010 is 69 cents per share. Although the current estimate is below the company’s own guidance, the analysts are in agreement about the company reporting in-line numbers, as there have been no estimate changes over the last 30 days.
Regarding the magnitude of estimate revisions, we see a significant change in the first quarter in the last 90 days. The analysts have reduced expectations over the last 3 months, sending the Zacks Consensus Estimate to 69 cents from 97 cents.
In terms of earnings surprises, Sohu delivered a 17.39% negative surprise in the fourth quarter of 2009, with the four-quarter average at around 1.67%.
Neutral recommendation
Sohu’s fourth-quarter earnings fell both year-over-year and quarter-over-quarter due to poor operating performance and was much below the Zacks Consensus Estimate. The company’s operating expenses have been steadily going up, which we fear could limit earnings growth. Moreover, recent delays in game launches and intense competition could further pressure performance.
However, strength in its online games and portal business is expected to be the strongest driver of growth beyond 2010. Moreover, Sohu is expected to benefit from China’s growing online advertising industry, and expects increased advertising spending in 2010 with the World Cup, World Expo and Asian games around the corner.
Although the company’s growing operating expenses led to a decline in profitability in 2009, revenues have steadily increased on account of increased online games revenue and strength in brand advertising. We expect the company to achieve the conservative Zacks Consensus Estimate for 2010 and advise investors to wait for a more favorable exit point.
We maintain our Neutral rating on the stock but reduce our price target to $57.00 from $65.00.
Read the full analyst report on “SOHU”
Zacks Investment Research
