Chinese web portal Sohu.com (SOHU) has reported its unaudited financial results for the first quarter ended March 31, 2007.

Total revenues for first quarter slipped to US$33.1 million, compared to revenues of US$34.4 million for fourth quarter ended December 31, 2006, and up from US$30.4 million for first quarter ended March 31, 2006.

Dr. Charles Zhang, Chairman and CEO of Sohu, commented, "We are continuing to build on Sohu's core strengths with another quarter of record brand advertising revenue. This clearly reflects advertisers' recognition of Sohu's premier content and the continued expanded user-base brought by our innovation and product enhancements, and the increasing Sohu branding associated with the approach of the Beijing 2008 Olympic Games. For the rest of 2007, our catalysts for brand advertising and online games are strong near-term positives. For the longer-term, we continue to devote our efforts to develop our technology, which we believe has not only enhanced our own business but has created an opportunity for us to continue to be a thought leader in the way new technologies change the Internet industry in China."

Gross margin of 61% in first quarter of 2007 decreased from 63% in the previous quarter and 67% in the same period of 2006. Non-GAAP gross margin was 62% in the first quarter of 2007, down from 65% in the previous quarter and 68% in the same period of 2006.

Net income for first quarter of 2007 was US$4.5 million or US$0.12 per fully diluted share. Non-GAAP net income for first quarter of 2007 was US$7.0 million or US$0.18 per fully diluted share. This compares to non-GAAP net income of US$8.1 million or US$0.21 per fully diluted share for fourth quarter 2006 and US$7.8 million or US$0.20 per fully diluted share for first quarter of 2006.

Advertising revenues for first quarter of 2007 totaled US$25.6 million, a 27% year-on-year increase and a 3% quarter-on-quarter increase. Advertising revenues, consisting of US$23.5 million in brand advertising and US$2.1 million in sponsored search, accounted for 77% of total revenues in the first quarter of 2007.

Brand advertising revenues for first quarter of 2007 increased 7% quarter-on-quarter and 41% year-on-year. Sponsored search revenues for first quarter of 2007 decreased 29% quarter-on quarter and 40% year-on-year. Advertising gross margin for first quarter of 2007 was 62%, down from 65% in the previous quarter and 73% in the first quarter of 2006. Non-GAAP advertising gross margin for first quarter of 2007 was 64%, down from 66% in the previous quarter and 75% in the first quarter of 2006. The declines in Sohu's gross margin were primarily due to the increase in content costs, bandwidth and server depreciation costs.

For the first quarter of 2007, Sohu's non-advertising revenues, which are derived mainly from wireless value-added services and online games, were US$7.5 million, representing 23% of total revenues. Non-advertising gross margin was 56% compared to 60% in the previous quarter and 55% in first quarter of 2006. Non-GAAP non-advertising gross margin was 56% compared to 60% in the previous quarter and 55% in the first quarter of 2006. The decline in non-advertising gross margin was primarily due to the decreased mix of higher margin revenues, a decrease in gross margin of certain wireless products and the increased server depreciation costs for our existing game.

For first quarter of 2007, Sohu's operating expenses totaled US$16.0 million. Non-GAAP operating expenses totaled US$13.9 million, a decrease of 4% from the previous quarter and up 9% year-on-year. The quarter-on-quarter decrease was mainly due to the decrease of our marketing expenses, while the year-on-year increase was primarily due to our increased re-investment in R&D for technology projects and product development, and increased marketing expenses for branding.

Ms. Carol Yu, Co-president and CFO of Sohu.com, stated, "We are pleased with the financial results we achieved in the first quarter of 2007. Although it was a seasonally weak quarter, our brand advertising revenue reached a historical record and exceeded our guidance. Our investments in premium video content, corporate branding and new products have started to pay off. With the increasing momentum from the rapidly approaching Beijing 2008 Olympics Games and our new online game TLBB, which will be contributing to our results in the second half of 2007, we are well positioned to have a good year."

Sohu estimates total revenues for the second quarter of 2007 to be between US$35.5 million to US$37.5 million, with advertising revenues of US$26.5 million to US$27.5 million and non-advertising revenues of US$9 million to US$10 million. Sohu estimates brand advertising revenues for the second quarter of 2007 to be between US$24.5 million to US$25.0 million.

As of March 31, 2007, Sohu's balance of cash, cash equivalents and investments in marketable debt securities was US$97.5 million, compared to US$129.7 million and US$137.5 million as of December 31, 2006 and March 31, 2006, respectively. The reduction in cash, cash equivalents and investments in marketable debt securities was due to the company's purchase of its Beijing headquarters at a purchase price of approximately $35.3 million, in January 2007.

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