Inc. Earnings: Searching for Growth

Source: shares fell 4% on Monday after posting uninspiring quarterly results. Sure, it doesn't help to be stepping up with fresh financials when market indexes in your home market are getting slammed. China's stock market has been getting rocked lately. However, Sohu didn't give investors the reasons that they were hoping for to keep holding on by announcing weak guidance on Monday.

The dot-com pioneer with interests in portals, gaming, video, and search saw revenue clock in at $493.6 million for the second quarter, 23% ahead of where it was a year earlier. All three of its major revenue streams -- brand advertising, search, and online gaming -- came through with double-digit top-line growth on a year-over-year basis.

Sohu's reported loss was also narrower than Wall Street expected, something that we've seen happen in four of the past five quarters. If Sohu beat on both ends of the income statement, why did its stock hit a fresh 52-week low on Monday? Well, the pessimism here is all about the near future.

Sohu is targeting $470 million to $500 million in revenue for the current quarter, and that's problematic for a couple of reasons. For starters, the midpoint of that range suggests that Sohu will post a sequential decline in revenue. That's no fun, and it also would mean just 13% in year-over-year growth. The other problem with the revenue outlook is that analysts were holding out for revenue to come in just north of $530 million for the current quarter.

Sohu is also eyeing a widening deficit on a reported basis, more red ink than what Wall Street pros were hoping to see.

The outlook paints an ugly picture at , Sohu's majority-owned subsidiary that was flying high a few years ago when online gaming was all the rage in China. Changyou held up fairly well during the second quarter, down slightly sequentially but up an encouraging 12% over the prior year to account for 35% of Sohu's total revenue. A pair of new mobile games helped drive results, but Changyou is realizing what folks in the U.S. have known for some time: Mobile gamers are fickle. Its forecast calls for shrinking revenue both sequentially and year over year.

The midpoint of Sohu's outlook calls for slight improvement in its brand advertising business, but the real rock star is once again its Sogou search engine. Sogou's revenue spiked 62% in its latest quarter when pitted against the prior year, and it sees a 51% to 60% year-over-year pop for the current quarter. Sogou should overtake brand advertising and Changyou to become the biggest contributor in terms of revenue at Sohu this quarter, but the market doesn't seem to think much about China's third-largest search engine. That's a shame because Sohu is in pretty good shape for a company hitting new lows. Armed with $1.2 billion in cash and about to become known more for its thriving paid search platform than its stagnant brand advertising and fading online gaming businesses, Sohu will have to wait for believers to buy back in.

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