Sohu.com Earnings: Will Weakness at Sogou Bite Baidu?

By Markets Fool.com

Image source: Sohu.com.

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Shares ofSohu.com (NASDAQ: SOHU)dropped 7% yesterday, moving lower after posting unsettling quarterly results. It was a pretty rough report, with revenue for the third quarter clocking in at $410.6 million, 21% below the $522.1 million it served up a year earlier. It was also a slight sequential dip from the $420.1 million it recorded during this year's second quarter. This is the fourth consecutive quarter that revenue has been going the wrong way, and it's also Sohu's worst year-over-year showing on the top line since going public at $13 a share in the summer of 2000.

Sohu has seen its display advertising and online gaming businesses slump in recent reporting periods, but now even its spunky search engine that seemed ready to take the growth baton is pulling up lame.

Sohu's original brand advertising business experienced a 27% top-line drop. A big factor in the accelerating shortfall is a sharp decline in its video advertising. Revenue for its Sohu Video portal has been more than cut in half over the past year.

Sohu's online gaming business -- basically its ownership stake in Changyou.com (NASDAQ: CYOU)-- was once against the biggest sinker, plummeting 35% over the past year. Changyou continues to rely too much on older games including TLBB and TLBB 3D as they fade in popularity. The goal continues to be the diversification of its revenue sources, but we're still waiting for that to translate into growth. Changyou is also working on its fourth straight quarter of declining revenue. Changyou did sell its 7Road business during the third quarter of last year, making this the last period where it'll experience a year-over-year dip in revenue. However, it still needs fresh hits to resume its growing ways. It bears pointing out that Changyou stock actually rose slightly on Monday after releasing its own quarterly results, suggesting that this segment's seemingly rough showing was in line with market expectations. It's not what dragged Sohu shares lower on Monday.

Then we get to Sogou. Sohu's search engine has been the silver lining through the last few reporting periods. It's no Baidu (NASDAQ: BIDU), but when it comes to search there's enough money to be made in the niche for a much smaller player like Sogou to carve out a cozy living. Revenue climbed a mere 2% to $151 million at Sogou. It was also a 6% top-line decline sequentially.

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Searching for more

The near-term challenge for search -- beyond the awkward mobile migration -- is that regulators clamped down on the way that search engines can serve up health-related ads following awell-publicized springtime deathof a university student that went to a questionable cancer treatment center. The incident happened on Baidu, but public outrage forced regulators to apply restrictions on the once lucrative health-related ads across all search engines. This is the first full quarter of those regulations, and it's clearly weighing on Sogou's once-stellar growth. Baidu reports on Thursday for the same three-month period, and Sogou's weakest quarterly performance since being broken out in Sohu's financials is something that Baidu investors can't ignore.

Sogou's revenue of $151 million still makes it the biggest driver at Sohu, accounting for 37% of the quarter's top-line results. It has come a long way since being a distant third among the three segments as recently as two years ago.

Sohu posted another quarterly loss, clocking in with an adjusted deficit of $1.68 a share. Sohu has now posted quarterly losses in 10 of the past 11 periods, and the only positive showing was the handiwork of Changyou's sale of its 7Road's Web gaming business.

Things won't get better in the near term. Sohu's guidance calls for yet another loss during the current quarter. It's also targeting between $370 million to $400 million in revenue, and even landing at the high end of that range would be Sohu's worst top-line showing since the first quarter of 2014.

The good news here is that Sohu closed out the period with $1.36 billion in cash and short-term investments. It's not going away anytime soon. There's still plenty of time to mount a turnaround, but investors may not be patient.

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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.