Sohu.com Gets Mixed Up in Q3

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Sohu.com (NASDAQ: SOHU) is hitting on nearly all cylinders, but sometimes that isn't enough. Shares of the Chinese online advertising, search, and gaming specialist moved lower on Friday after the company posted mixed financial results. The stock had hit a two-year high in mid-October.

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Sohu's revenue clocked in at $516.1 million for its third quarter, a 25.7% spike when pitted against the prior year's showing. It's Sohu's healthiest year-over-year gain in revenue since late 2013, and it follows a streak of six consecutive quarters of declining revenue that ended with a nearly 10% gain in this year's second quarter. This also naturally means that the company was going up against depressed results from a year earlier. And as impressive as the growth may seem to be, Sohu actually generated $522.1 million in revenue during the same quarter two years ago. 

Beneath the surface

The company's guidance in late July targeted $480 million to $510 million in revenue for the third quarter, so Sohu actually exceeded even the high end of its range. It did the same thing during the second quarter -- nailing $461.2 million in revenue to barrel through the forecast of $390 million to $420 million it had set in late April -- and the market rewarded investors with fresh highs over the summer. Share price went the other way this time, likely the result of Sohu's widening losses, the buoyant share price, and the incomplete guidance in light of its recent move to spin off its fast-growing search business.  

Sohu's earlier guidance calling for another double-digit drop in its original brand advertising business proved to be spot-on. Brand advertising plummeted 33% to $75 million. Sohu blames the slide on weakness with large advertisers, as well as the souring market for real estate ads. 

Sogou, China's third-largest search engine, was once again the star for Sohu. Search and search-related ad revenue soared 50% to $225 million for the period. That leaves online gaming -- led by its Changyou (NASDAQ: CYOU) online gaming business -- rising a healthy 34% to $132 million.

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The bottom line is still not for the squeamish. A one-off impairment charge of $87 million for Changyou made a steep loss even steeper, but there's still more red ink here than what the company prepared investors for three months ago. Deficits remain a problem, as Sohu has now posted a loss in 14 of the past 15 quarters.

Because of the proposed IPO of Sogou, Sohu offered up guidance only for Changyou, where it's targeting $145 million to $155 million in total revenue, with online games revenue of $110 million to $120 million. There are a lot of moving parts at Sohu these days, and Friday's market reaction suggests that not everything is moving in the right direction.

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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool recommends Sohu.com. The Motley Fool has a disclosure policy.