Piper Jaffray zu Sohu.com
Safa Rashtchy, Internet Media and Marketing
SOHU (#>) $39.85 - OP - Mkt Cap (mil) = $1,594.0
KEY POINTS:
Business momentum remains strong. Sohu.com's business momentum remains strong, with plenty of catalysts to drive upside to our estimates. Advertising revenues experienced its fifth consecutive quarter of year-over-year growth acceleration, and the mid-point of the company's guidance range suggests the company will see further acceleration in third quarter. While SMS revenues will likely experience a hiccup in third quarter due to a dropping of an affiliate customer acquisition channel, we believe the company's guidance contemplates a conservative scenario and we expect continued solid growth over the next three quarters (despite the affiliate issue, we expect a 260 percent year-over-year growth in third quarter).
Quarter summary. The company reported second quarter revenues in-line with its pre-released range and our estimates. Advertising revenues were $6.8m, representing a 100 percent year-over-year growth rate, non-advertising revenues of $12.5m grew 350 percent on a year-over-year basis, while total revenues of $19.3m grew over 200 percent on a year-over-year basis. The company reported gross profits of $13.1m, representing a gross margin expansion of over 400 basis points from 64 percent in first quarter to 68 percent this quarter. Operating income this quarter was $7.3m, representing operating margin expansion of nearly 800 basis points from 30 percent in first quarter to 38 percent this quarter. We are maintaining our 2003 and 2004 estimates, except for minor tax adjustment (see next page).
Key growth areas to watch. Advertising revenues are on a strong growth path with over 350 advertisers while the company is also monetizing its nascent paid search directory efforts with over 40,000 small businesses - a size that is comparable to Overture's business advertiser count several years into its operation. Online gaming, while delayed by a few months because of SARS, is on track to be launched in third quarter and could be meaningful by fourth quarter. Finally, we believe the company will expand its SMS services to cover new products. We are also reasonably comfortable that the revenue share agreements aren't likely to results in materially higher costs for SOHU.
Compelling growth story. We continue to believe SOHU represents a compelling growth story as it leverages Internet penetration and mobile phone expansion to drive triple digit growth for 2003. Recently, China Internet Network Information Center, a government sponsored agency, announced that Chinese Internet users grew to 68.0m as of July 2003 (a 15 percent increase from January's reported 59.1m Internet users). We expect the total Internet users to increase to nearly 200m by 2007, a 25 percent compounded growth rate. In addition, China currently has over 200m mobile phone subs and expect that amount to increase to 300m in 2004. We believe the confluence of growth in Internet users and mobile subs will drive a 75 percent growth rate in 2004. Risks include margin contraction, exposure to wireless carriers, competition, government regulation, and corporate structure
Safa Rashtchy, Internet Media and Marketing
SOHU (#>) $39.85 - OP - Mkt Cap (mil) = $1,594.0
KEY POINTS:
Business momentum remains strong. Sohu.com's business momentum remains strong, with plenty of catalysts to drive upside to our estimates. Advertising revenues experienced its fifth consecutive quarter of year-over-year growth acceleration, and the mid-point of the company's guidance range suggests the company will see further acceleration in third quarter. While SMS revenues will likely experience a hiccup in third quarter due to a dropping of an affiliate customer acquisition channel, we believe the company's guidance contemplates a conservative scenario and we expect continued solid growth over the next three quarters (despite the affiliate issue, we expect a 260 percent year-over-year growth in third quarter).
Quarter summary. The company reported second quarter revenues in-line with its pre-released range and our estimates. Advertising revenues were $6.8m, representing a 100 percent year-over-year growth rate, non-advertising revenues of $12.5m grew 350 percent on a year-over-year basis, while total revenues of $19.3m grew over 200 percent on a year-over-year basis. The company reported gross profits of $13.1m, representing a gross margin expansion of over 400 basis points from 64 percent in first quarter to 68 percent this quarter. Operating income this quarter was $7.3m, representing operating margin expansion of nearly 800 basis points from 30 percent in first quarter to 38 percent this quarter. We are maintaining our 2003 and 2004 estimates, except for minor tax adjustment (see next page).
Key growth areas to watch. Advertising revenues are on a strong growth path with over 350 advertisers while the company is also monetizing its nascent paid search directory efforts with over 40,000 small businesses - a size that is comparable to Overture's business advertiser count several years into its operation. Online gaming, while delayed by a few months because of SARS, is on track to be launched in third quarter and could be meaningful by fourth quarter. Finally, we believe the company will expand its SMS services to cover new products. We are also reasonably comfortable that the revenue share agreements aren't likely to results in materially higher costs for SOHU.
Compelling growth story. We continue to believe SOHU represents a compelling growth story as it leverages Internet penetration and mobile phone expansion to drive triple digit growth for 2003. Recently, China Internet Network Information Center, a government sponsored agency, announced that Chinese Internet users grew to 68.0m as of July 2003 (a 15 percent increase from January's reported 59.1m Internet users). We expect the total Internet users to increase to nearly 200m by 2007, a 25 percent compounded growth rate. In addition, China currently has over 200m mobile phone subs and expect that amount to increase to 300m in 2004. We believe the confluence of growth in Internet users and mobile subs will drive a 75 percent growth rate in 2004. Risks include margin contraction, exposure to wireless carriers, competition, government regulation, and corporate structure
