Sohu has typically taken a quieter role in the gang of four that are China’s big internet portals; less flashy than upstart Tencent, and less cutting-edge than Sina and its much-hyped microblog, but bigger and more seasoned than NetEase, which despite its popular email service is basically the portal equivalent of a pimply adolescent.
But Sohu’s first quarter results did not fly under the radar. Sohu announced forecast-beating revenue and profit, sending its stock to a one-year high. Net income grew 41% from the previous year to US$39.3 million, while total revenues climbed 35% to US$174.4 million, well over company guidance.
Sohu capped off strong results by starting a new round of preliminary testing on Monday for its big summer game release, Duke of Mount Deer (DMD). Management said marketing efforts for DMD will pressure margins in the second quarter, but the game should boost revenues later in the year.
Investors are looking forward to the launch of this wackily-titled game because it may help Sohu’s listed subsidiary, Changyou, to diversify its business. Tian Long Ba Bu (TLBB), an online game that was released in 2007, generates a big chunk of Changyou’s revenue, which in turn generates more than half of Sohu’s revenue. Frequent updates have helped TLBB to hold up remarkably well, but its age is still a source of risk. So is the age of its fans.
Beyond games, brand ad revenue accounted for a bigger piece of the pie this quarter (33% of Q1 2011 revenue, compared with 30.5% one year ago), although it’s probably too early to call that a sustainable trend.
The company cited an increase in real estate, FMCG and auto advertising, but Sohu and other portal advertisers could also be benefiting from the recent influx of private equity, venture capital and IPO proceeds into the internet sector. Currently, Sohu’s portal site features ads for online clothing retailer VANCL and health product retailer go9939.com, along with big accounts like Siemens, HP and TCL.
Management reported that Sohu’s video site is growing in terms of audience – iResearch ranks the site second (presumably after Youku) in terms of market share for total time spent by users watching online videos. However, the details given by management suggest the site is not yet generating much revenue (and is surely eating up its fair share of expenses). Company CFO Carol Yu dodged giving an actual revenue figure, but said video site revenues were up 150% y-o-y from a small base last year.
In comparison, Sohu’s search business grew 183% y-o-y but still basically remains a non-starter, generating revenues of $8 million in the first quarter. Charles Zhang said that Sohu has captured only about 4% market share in terms of search engine traffic and about 1.6% in terms of revenue.
Management also announced a promising plan for the second half of the year to move into web games, a segment that Tencent is doing particularly well in. iResearch has forecast the webgames industry to grow by more than 40% this year. As part of the strategy, Sohu also announced its acquisition of web developer Shenzhen 7Road Technology Corporation. The move could counteract slowing growth in the online games industry and help shore up the company’s fortunes in case its aging MMORPG fans start putting family and careers first,