Nov. 3, 2009 (Lintette Ng) Third quarter earnings for Sohu.com (NASDAQ:SOHU) showed signs of improvement after two consecutive quarters of negative net income growth. Based on third quarter results released on October 26, 2009, net income was $37.4 million which represented an increase by 12.9% from the previous quarter, but down 7% from third quarter last year. Nevertheless, it was a positive change after profitability declined from $56.6 million at the end of 2008 to $33.5 million in mid 2009.
The increased in profitability was attributable to rising revenues in its online game sector. Revenues from online games were $68.7 million, which was a 3% increase from last quarter, and a 25.8% increase from third quarter 2008. Massively multi-player online games (MMORPG) unit of Sohu.com (NASDAQ:SOHU), Changyou.com (NASDAQ: CYOU), reported a 9.5% increase in third quarter net income due to an increased popularity of their in-house developed Tian Long Ba Bu (TLBB). TLBB is one of the 3 online games offered by Changyou, alongside licensed Blade Online and Blade Hero 2. However, Changyou.com (NASDAQ:CYOU) currently still relies heavily on TLBB for profits, which is a significant business risk to both Changyou.com and Sohu.com (NASDAQ:SOHU).
Brand advertising has also improved since the beginning of 2009. As demonstrated by the graph above, despite the gradual increase in online game profits in 2009, Sohu’s net income has declined dramatically since December as a result of the sluggish performance in the brand advertising industry. Demand has been slow for brand advertising as companies conserve their funds following the financial crisis. However, third quarter brand advertising revenues were up 11.2 % from last quarter, and down 1.8% from the same quarter last year (see illustration below). Last year’s third quarter brand advertising revenues were comparatively higher due to heavy advertising during the Beijing Olympics.
The rising revenues in the online games and brand advertising sectors pushed total revenues to a record high level of $136.6 million. Revenues were up 7% from second quarter, and up 13% from third quarter 2008.
Forth Quarter Estimates
Based on the average growth rates over the last ten quarters, fourth quarter total revenues are estimated to be approximately $138.8 million, with net income approximately $38.4 million. Total revenues are expected to grow at 1.6%, and net profit growth is projected to be 2.9%.
Growth in Sohu’s online games sector in recent quarters has been slow, but with three other games in the planning phases to be release in the future by Changyou.com (NASDAQ:CYOU), it has potential for improvement,. These games include ‘Immortal Faith’, ‘Legend of the Ancient World’, and the in-house ‘Duke of Mount Deer’. Changyou has also recently signed a multi-license agreement in October to use BigWorld’s Technology Suite that would enhance the quality of their upcoming games. With these developments in place, gaming sector for Sohu.com (NASDAQ:SOHU) looks promising, but we would not expect to see these results until 2010 when the games are due to be released.
In terms of brand advertising, as the Chinese economy is still recovering from the impact of the crisis, the level of demand for brand advertising remains fairly uncertain. However, China’s GDP growth which slowed to 6.1% at the beginning of this year has progressed to 7.7% overall for the first three quarters. Thus, there is a fair possibility that expenditure on brand advertising would increase.