Sohu.com Earnings: Still Searching for a Turnaround

By Markets Fool.com

Image source: Sohu.com.

Continue Reading Below

There is still a lack of growth for one of China's earliest growth stock darlings.Sohu.com (NASDAQ: SOHU)-- one of the country's first publicly traded Internet companies -- kicked off the new trading week with another period of red ink and declining revenue.

Sohu.com's revenue for the second quarter clocked in at $420 million, 15% below where it was a year earlier but a modest improvement from the $408 million it recorded on the top line during this year's first quarter.Revenue continues to shrink across all of its businesses outside of its Sogou search engine, and even that once-scintillating segment is showing the wear and tear of decelerating growth.

Sohu's brand advertising business -- its original portal business and anything else outside of search that it can slap brand ads on -- experienced a 25% plunge in revenue. Online gaming, which is essentially its ownership stake in Changyou.com (NASDAQ: CYOU), went through an even more brutal 42% year-over-year slide on the top line. It was up to Sogou to offset some of those sharp slides, but the 19% uptick wasn't enough to keep Sohu's overall revenue from posting another period of double-digit percentage declines.

Sogou's revenue of $176 million now makes it the clear driver at Sohu, accounting for 42% of the quarter's top-line results. Pitted against the $113 million in brand advertising revenue and $99 million out of its consolidated stake in Changyou, it's probably a good segment to be leading the way.

A brand-new Sohu

Continue Reading Below

It's a dramatic makeover for Sohu, where search was a distant third of the three segments as recently as two years ago.There are certainly challenges in the paid search realm these days. Regulatory agencies are cracking down on the way platforms serve up lucrative health-related ads in light of a prolific springtime deathof a university student that sought treatment from a questionable cancer center that was a prominent advertiser on a rival search engine.

Sogou's response was to quickly roll out Sogou Wise Doctor, an ad-free service offering authoritative healthcare information. It's the right thing to do given the regulatory climate, but naturally it may get in the way of the juicy payouts that medical companies were willing to shell out for customer leads before this all happened. With its advertising business already seeing declines in real estate ads and its once fast-growing video portal, the health-related marketing setback is just adding insult to injury at Sohu.

The news doesn't get any better on the bottom line, where Sohu has now cranked out quarterly deficits in nine of the past 10 quarters. Changyou's drag on results has typically been the catalyst for the deficit, but this quarter was Sohu's first time posting an operating loss before we get to Changyou in more than a year.

It was a rough quarter, and it also doesn't help that Sohu barely landed at the low end of its initial guidance for the quarter calling for $420 million to $450 million in revenue. Its outlook for the current quarter calls for between $400 million to $430 million on the top line. It sees year-over-year growth at Sogou decelerating yet again to a mere single-digit advance this time while the rest of its businesses continues to fade. This isn't Sohu at its best, but armed with $1.4 billion in cash, it has more than enough chances to complete a successful turnaround.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Sohu.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.