Sohu.com (NASDAQ:SOHU) Q4, FY2009 Financial Results

Total Revenues of US$515.2 Million; Up 20% Year-over-Year

BEIJING, Feb. 1 -- Sohu.com Inc. (NASDAQ:SOHU) , China's leading online media, communications, search, online games and mobile value-added services group, today reported unaudited financial results for the fourth quarter and fiscal year ended December 31, 2009.

Fourth Quarter Highlights
-- Total revenues were US$135.8 million, up 12% year-over-year, in line
with the Group's guidance.
-- Brand advertising revenues were US$45.9 million, up 2% year-over-year
and in line with the Group's guidance.
-- Online game revenues reached a record US$70.7 million, up 21% year-
over-year and 3% quarter-over-quarter, in line with the Group's
guidance.
-- Before deducting the share of net income pertaining to the Non-
Controlling Interest in the Group's online game subsidiary Changyou,
non-GAAP net income for the fourth quarter of 2009 was US$50.3 million,
in line with the Group's guidance.
-- After deducting the share of net income pertaining to the Non-
Controlling Interest in Changyou, on a fully diluted basis, non-GAAP
net income for the fourth quarter of 2009 was US$35.8 million, or US 92
cents per fully diluted share, in line with the Group's guidance.

Fiscal Year 2009 Highlights
-- Record total revenues and record revenues for each category.
-- Total revenues reached US$515.2 million, up 20% compared to 2008.
-- Brand advertising revenues were US$177.1 million, up 5% compared to
2008.
-- Online game revenues reached US$267.6 million, up 33% compared to
2008.
-- Before deducting the share of net income pertaining to the Non-
Controlling Interest in Changyou, non-GAAP net income was US$197.7
million, up 17% compared to 2008.
-- After deducting the share of net income pertaining to the Non-
Controlling Interest in Changyou, on a fully diluted basis, non-GAAP
net income was US$155.3 million, or US$3.98 per fully diluted share.

Explanation of the Group's non-GAAP financial measures and related reconciliations to GAAP financial measures are included in the accompanying "Non-GAAP Disclosure" and the "Reconciliation to Unaudited Condensed Consolidated Statements of Operations."

Dr. Charles Zhang, Chairman and CEO of Sohu, commented, "We are pleased to report another quarter of solid financial results built on the accomplishments of an exceptional year which saw us deliver record results along with an enormously successful listing of our MMORPG subsidiary Changyou. Effective business strategies and high-quality products have allowed Sohu to overcome the sluggish economy of 2009 and gain market share in many of our key business segments.

"We continue to position ourselves for long-term and sustainable growth through ongoing investments in our two complementary core businesses, namely our portal business and online game business. We believe our emphasis on securing and developing leading internet video content and technologies will drive impressive growth in both users and advertising revenues in 2010. Our persistent efforts in fighting online video piracy have started to bear fruit and have made Sohu the partner of choice for leading global and local media companies. Our online game business also continues to deliver impressive results and progress. While our three healthy and growing existing games continue to deliver solid revenues, our highly anticipated and diverse 2010 pipeline of five games will bring us increasing momentum in the coming quarters. Our second in-house developed game Duke of Mount Deer, one of the most anticipated online games in China, is progressing smoothly."

Commenting on Sohu's brand advertising business, Ms. Belinda Wang, Co-President and COO, added, "Brand advertising revenues were relatively modest during the fourth quarter, up 2% year-over-year. We expect advertisers to increase their marketing activities in 2010 with events such as the World Cup, Asian Games and World Expo, providing new opportunities for us to showcase our well-established media platform. We are well-positioned to capitalize on the online advertising recovery as brands continue to turn to us for new advertising solutions."

Fourth Quarter Financial Results

Revenues

Total revenues for the fourth quarter ended December 31, 2009 were US$135.8 million, representing a decrease of 1% sequentially and an increase of 12% year-over-year.

Brand advertising revenues for the fourth quarter of 2009 totaled US$45.9 million, representing a sequential decrease of 5% and an increase of 2% year-over-year. Gross brand advertising revenues before business tax for the fourth quarter were US$50.2 million.

Online game revenues for the fourth quarter of 2009 were US$70.7 million, representing increases of 3% sequentially and 21% year-over-year.

Wireless revenues for the fourth quarter of 2009 were US$15.7 million, representing a decrease of 7% sequentially and an increase of 6% year-over-year. The quarter-over-quarter decrease was mainly attributable to China Mobile discontinuing the billing for WAP services in late November.

Gross Margin

Both GAAP and non-GAAP gross margin were 75% in the fourth quarter of 2009, compared with 76% in the third quarter of 2009 and 75% in the fourth quarter of 2008.

Brand advertising gross margin for the fourth quarter of 2009 was 65%, compared with 68% in the third quarter of 2009 and 66% in the fourth quarter of 2008. Non-GAAP brand advertising gross margin for the fourth quarter of 2009 was 65%, compared with 69% in the third quarter of 2009 and 67% in the fourth quarter of 2008.

Both GAAP and non-GAAP online game gross margin in the fourth quarter of 2009 were 92%, compared with 93% in the third quarter of 2009 and 93% in the fourth quarter of 2008.

Both GAAP and non-GAAP wireless gross margin for the fourth quarter of 2009 were 44%, compared with 43% in the third quarter of 2009 and 46% in the fourth quarter of 2008.

Operating Expenses

For the fourth quarter of 2009, Sohu's operating expenses totaled US$48.8 million. Non-GAAP operating expenses totaled US$45.0 million, down 4% sequentially from US$46.7 million and up 14% year-over-year. The year-on-year increase primarily reflects an increase in marketing expenses.

Operating Margin

Non-GAAP operating profit margin was 42% for the fourth quarter of 2009, compared with 42% in the previous quarter and 43% in the fourth quarter of 2008.

Income Tax Expense

For the fourth quarter of 2009, excluding non-cash income tax expense of US$3.9 million recorded for the tax benefits from share-based awards, non-GAAP income tax expense was US$8.2 million, compared with US$7.0 million in the previous quarter.

Net Income

Before deducting the share of net income pertaining to the Non-Controlling Interest in Changyou, GAAP net income for the fourth quarter of 2009 was US$42.4 million, down 10% quarter-over-quarter and 25% year-over-year. Non-GAAP net income for the fourth quarter of 2009 was US$50.3 million, down 2% quarter-over-quarter and 15% year-over-year, in line with the Group's guidance.

After deducting the share of net income pertaining to the Non-Controlling Interest in Changyou, GAAP net income attributable to Sohu for the fourth quarter of 2009 was US$29.4 million, or US 76 cents per fully diluted share. Non-GAAP net income attributable to Sohu for the fourth quarter of 2009 was US$35.8 million, or US 92 cents per fully diluted share, a decrease of 4% quarter-over-quarter, in line with the Group's guidance.

Cash Balance

The Group continued to maintain a debt-free balance sheet and a strong cash position of US$563.8 million as of December 31, 2009.

Fiscal Year 2009 Financial Results

Revenues

Total revenues for the fiscal year 2009 were US$515.2 million, up 20% compared to 2008.

Brand advertising revenues for the fiscal year 2009 were US$177.1 million, up 5% compared to 2008. Gross brand advertising revenues before business tax for the fiscal year 2009 were US$193.8 million.

Online game revenues for the fiscal year 2009 were US$267.6 million, up 33% compared to 2008. Revenues from game operations for the fiscal year 2009 were US$259.8 million, up 33% compared to 2008. Overseas licensing revenues for the fiscal year 2009 were US$7.8 million, up 8% compared to 2008.

Wireless revenues for the fiscal year 2009 were US$60.8 million, up 29% compared to 2008.

Gross Margin

Both GAAP and non-GAAP gross margin were 76% for the fiscal year 2009, compared to 75% in 2008.

Brand advertising gross margin was 66% for the fiscal year 2009, compared to 65% in 2008. Brand advertising non-GAAP gross margin was 67% for the fiscal year 2009, compared to 66% in 2008.

Online game gross margin was 93% for the fiscal year 2009, compared to 93% in 2008. Online game non-GAAP gross margin was 94% for the fiscal year 2009, compared to 93% in 2008.

Both GAAP and non-GAAP wireless gross margin were 43% for the fiscal year 2009, compared to 48% in 2008.

Operating Expenses

For the fiscal year 2009, Sohu's operating expenses totaled US$187.5 million. Non-GAAP operating expenses for the fiscal year 2009 increased 15% to US$171.3 million. The year-over-year increase primarily reflects an increase in head count and related costs, as well as an increase in marketing expenses.

Operating Margin

Non-GAAP operating profit margin for the fiscal year 2009 was 43%, compared to 41% in 2008.

Income Tax Expense

For the fiscal year of 2009, excluding non-cash income tax expense of US$3.9 million recorded for the tax benefits from share-based awards, non-GAAP income tax expense was US$29.8 million, compared with US$9.0 million in the previous year.

Net Income

Before deducting the share of net income pertaining to the Non-Controlling Interest in Changyou, GAAP net income for the fiscal year 2009 was US$176.4 million, up 11% compared to 2008; non-GAAP net income for the fiscal year 2009 was US$197.7 million, up 17% compared to 2008.

After deducting the share of net income pertaining to the Non-Controlling Interest in Changyou, GAAP net income for the fiscal year 2009 was US$139.3 million, or US$3.57 per fully diluted share. Non-GAAP net income attributable to Sohu for the fiscal year 2009 was US$155.3 million, or US$3.98 per fully diluted share.

Supplementary Metrics for the Group's Online Game Results

Fourth Quarter 2009 Operational Results

Aggregate registered accounts for Changyou's games as of December 31, 2009 increased 8% quarter-over-quarter and 41% year-over-year to 80.9 million.

Aggregate peak concurrent users ("PCU") for Changyou's games was approximately 990,000, an increase of 9% quarter-over-quarter and an increase of 19% year-over-year.

Aggregate active paying accounts ("APA") for Changyou's games was flat quarter-over-quarter and increased 21% year-over-year to 2.4 million.

Average revenue per active paying account ("ARPU") for Changyou's games increased 3% quarter-over-quarter and 1% year-over-year to RMB196, which Changyou believes is within a range that is affordable for the majority of Chinese game players.

Fourth Quarter and Fiscal Year 2009 Revenues

Total revenues for the fourth quarter of 2009 increased 3% quarter-over-quarter and 21% year-over-year to US$70.7 million. Total revenues for the fiscal year 2009 were US$267.6 million, an increase of 33% from US$201.8 million for the fiscal year 2008.

Revenues from game operations for the fourth quarter of 2009 increased 3% quarter-over-quarter and 22% year-over-year to US$68.6 million. The sequential increase primarily reflects the growing popularity of Changyou's games. The year-over-year increase was mainly due to increased popularity of Changyou's flagship game, TLBB. Revenues from game operations for the fiscal year 2009 were US$259.8 million, an increase of 33% from US$194.6 million for the fiscal year 2008. The increase was mainly due to increased popularity of Changyou's flagship game, TLBB.

Overseas licensing revenues for the fourth quarter of 2009 increased 15% quarter-over-quarter and 5% year-over-year to US$2.1 million. Overseas licensing revenues for the fiscal year 2009 were US$7.8 million, an increase of 8% from US$7.2 million for the fiscal year 2008. The increase was mainly due to increased momentum of TLBB in Vietnam and Malaysia.

Stock Repurchase Program

During the fourth quarter of 2009, under the stock repurchase program approved by Board in the third quarter of 2008, Sohu repurchased 751,224 shares common stock at an average price of US$53.26, for total consideration of US$40.0 million.

As of December 31, 2009, Sohu had purchased 1,252,910 Sohu shares in the open market, at an average price of US$47.89 for a total consideration of US$60.0 million.

Ms. Carol Yu, Co-President and CFO of Sohu, commented, "Including our fourth quarter results, Sohu has generated record total revenues in eleven out of the past twelve quarters; an impressive accomplishment considering the challenging economic environment of 2009. We are very pleased with our results in 2009 as we consistently achieved balanced growth across our key businesses. Going forward into 2010, we are confident in our ability to leverage our strong balance sheet and sound business strategies to achieve sustainable growth that will deliver long-term value to our shareholders."

Business Outlook

Sohu estimates total revenues for the first quarter of 2010 to be between US$123.0 million and US$128.0 million, with advertising revenues of US$40.0 million to US$42.0 million.

Sohu estimates brand advertising revenues for the first quarter of 2010 to be between US$38.0 million and US$40.0 million.

Sohu estimates online game revenues for the first quarter of 2010 to be between US$70.0 million and US$73.0 million.

Sohu estimates non-GAAP net income for the first quarter of 2010, before deducting the share of non-GAAP net income pertaining to the Non-Controlling Interest in Changyou, to be between US$45.0 million to US$47.5 million. After deducting the share of non-GAAP net income pertaining to the Non-Controlling Interest in Changyou, Sohu estimates non-GAAP net income for the first quarter of 2010 to be between US$31.0 million to US$33.0 million and non-GAAP fully diluted earnings per share for the first quarter of 2010 to be between US 78 cents and US 83 cents.

Taking into consideration impact of the recent new grants of share-based awards, Sohu estimates compensation expense and income tax expense related to share-based awards for the first quarter of 2010 to be between US$6.5 million and US$7.5 million, which includes Changyou's share-based compensation expense for the first quarter of 2010 estimated to be between US$3.0 million and US$3.5 million. Considering Sohu's share in Changyou, the estimated impact of this expense is expected to reduce Sohu's fully diluted earnings per share for the first quarter of 2010 under US GAAP by US 14 cents to US 16 cents.

Source: Sohu.com (NASDAQ:SOHU)