Inc. Earnings: Catching Up to Baidu

Source: is starting to live up to the dot-com hype that made it an early darling before investing in Chinese growth stocks was a good idea. The dot-com pioneer with interests in portals, gaming, video, and search came through with better than expected financial results on Monday.

Revenue grew 25% to $455 million in the first quarter, well ahead of the $439.3 million that Wall Street pros were targeting. There are a few moving parts to Sohu's financial performance -- its flagship brand advertising business, , and its search engine -- but they are all material to Sohu's overall performance.

Brand advertising rose 20%, fueled largely by the growing popularity of its video portal. Changyou, Sohu's online gaming business, was actually its slowest grower, up just 13% since the prior year. This is the company's largest subsidiary, and a new game released late in 2014 was credited with the businesse's growth.

Then we have Sogou, Sohu's fast-growing search engine. Sogou is China's third-largest search engine, but it's a distant bronze medalist in a market dominated by Baidu . It's the fastest growing of Sohu's three primary businesses, with revenue up 63% over the first three months of last year. The $105 million is a sliver of what Baidu is expected to report when it steps up with fresh financials later this week, but Sogou is likely to have grown at a speedier pace.

With brand advertising and Sogou growing faster than Changyou, again, the three main segments are starting to become more equal top-line contributors. Brand advertising, Changyou, and Sogou accounted for 29%, 41%, and 23% of the revenue mix, respectively, for the period.

Things don't look so great as we work our way down the income statement. It's not cheap to run a thriving video portal, and a spike incontent and bandwidth costs ate into bottom-line results. Another margin-gnawing culprit was the shift at Changyou to emphasize lower-margin mobile and licensed PC games that typically have to shell out revenue-sharing payouts.

The end result is that Sohu clocked in with a deficit of $0.81 a share, or an adjusted loss of $0.66 a share. That's not great, but it's actually much less redink than the market anticipated.

Sohu shares moved barely higher on Monday's report, as beating expectations on both ends of the income statement was offset by soft guidance. Sohu forecast $460 million to $490 million in revenue for the current quarter, translating into 15% to 22% year-over-year growth. Analysts were holding out for more. Sohu's guidance also calls for a larger quarterly loss than the market was expecting.

The outlook rained on Sohu's parade, but the outlook for investors is rosier for a company armed with $1.1 billion in net cash and thriving in a paid search niche where Baidu commands a hefty market premium.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Baidu and The Motley Fool owns shares of Baidu. 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.

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