Zhang Chaoyang's US$600 million increase in Sohu may be a prelude to privatization

On December 17, according to PR Newswire, Sohu announced that its board of directors had received a preliminary non-binding privatization offer submitted by Chairman and CEO Zhang Chaoyang, proposing to invest a total of up to US$600 million in cash to acquire the company's common shares and convertible bonds.

On December 17, according to PR Newswire, Sohu announced that its board of directors had received a preliminary non-binding privatization offer submitted by Chairman and CEO Zhang Chaoyang, proposing to invest a total of up to US$600 million in cash to acquire the company's common shares and convertible bonds. The purchase price of common shares is the last transaction price on the day before the subscription agreement is signed, but does not exceed US$50.

The Special Financing Committee of Sohu's Board of Directors will evaluate and recommend the acquisition intention to the board of directors, and will request Kaiyi's legal adviser for this transaction and investment bank Barclays as financial adviser for the transaction. Sohu currently has a market value of about US$1.99 billion. Sohu closed today at US$51.50, up US$0.35, or 0.68%.

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Sohu Q3's net profit of US$39 million turned around year-on-year.

On October 26, Sohu (Nasdaq:SOHU) released its unaudited financial report for the third quarter of 2015 as of September 30, 2015. Data shows that Sohu's total revenue in the third quarter was US$522 million, a year-on-year increase of 21%, and a month-on-month increase of 6%; net profit attributable to Sohu was US$39 million, compared with a net loss of US$28 million in the same period last year. The net loss in the previous quarter was US$28 million.

Total revenue from key results for the third quarter

was US$522 million, a 21% increase from the same period in 2014 and a 6% increase from the previous quarter. Brand advertising revenue was US$152 million, a 2% increase from the same period in 2014 and the same as the previous quarter. Among them, revenue from Sohu Media Platform, other Sohu Media business excluding video business, was US$51 million, a decrease of 6% from the same period in 2014 and a decrease of 2% from the previous quarter. Sohu's video advertising revenue was US$57 million, a 9% increase from the same period in 2014 and a 4% decrease from the previous quarter. Sogou's revenue was US$162 million, a 53% increase from the same period in 2014 and a 10% increase from the previous quarter. Online game revenue was $153 million, unchanged from the same period in 2014 and down 12% from the previous quarter. The U.S. GAAP net income attributable to Sohu was US$39 million, and the U.S. GAAP net income per diluted share was US$1.00; the non-GAAP net income attributable to Sohu was US$49 million, and the non-GAAP net income per diluted share was US$1.27.

"Against the background of the economic downturn and the significant depreciation of the RMB, I am satisfied with Sohu's results in the third quarter. China's economic growth slowed to a low since 2009 last quarter. Macroeconomic weakness has seriously affected the marketing budgets of traditional brand advertisers. In addition, the depreciation of the RMB against the U.S. dollar also has an adverse impact on our financial figures reported in U.S. dollars. Despite these unfavorable factors, excluding the impact of non-recurring events, our total revenue was in line with expectations, while operating profit was significantly better than expected." Zhang Chaoyang, chairman and CEO of Sohu Company, said.

Zhang Chaoyang said,"In the third quarter, we continued to improve the interface of the news client product under Sohu Media Platform to improve user experience, while striving to improve content quality to provide users with high-quality news and reliable information. In terms of video, while adopting a cautious strategy to purchase header content, we are more actively deploying homemade and PGC content. Sogou's revenue and profits continued to maintain strong growth, and began to increase efforts to promote Sogou's search brand. Changyou continues to contribute solid revenue and cash flow. With its strong R & D capabilities and the huge user base accumulated by its flagship game "Tianlong Babu", Changyou is ready to launch more new popular games."

Wang Xiaochuan, CEO of Sogou, said: "In the third quarter, Sogou's revenue and profits both hit record highs, and mobile search traffic surpassed PCs for the first time. In terms of differentiated mobile search services, we continue to strengthen cooperation with Tencent's social platform to access more unique and high-quality content. Based on deep learning technology, the market-leading Sogou mobile phone input method has made great progress in the field of voice and image recognition. Sogou's revenue in the third quarter reached US$162 million, a year-on-year increase of 53%. Net income under non-GAAP reached US$34 million, more than five times the same period last year. As Sogou's entire product line matures day by day, we will more actively increase the promotion of the Sogou brand and continue to expand the scale of users."

Third quarter Group performance

revenue

Total revenue for the third quarter of 2015 was US$522 million, a 21% increase from the same period in 2014 and a 6% increase from the previous quarter.

Total online advertising revenue for the third quarter of 2015 was US$299 million, a 21% increase from the same period in 2014 and a 5% increase from the previous quarter. Total online advertising revenue includes brand advertising and search and search-related business revenue.

Brand advertising revenue in the third quarter of 2015 was US$152 million, a 2% increase from the same period in 2014 and the same as the previous quarter. Revenue from Sohu Media Platform, other Sohu Media business excluding video, was US$51 million, down 6% from the same period in 2014 and 2% from the previous quarter. Sohu's video advertising revenue was US$57 million, a 9% increase from the same period in 2014 and a 4% decrease from the previous quarter.

Search and search-related business revenue for the third quarter of 2015 was US$148 million, a 50% increase from the same period in 2014 and a 9% increase from the previous quarter. The year-on-year and month-on-month growth was mainly due to the growth of paid clicks and the higher average cost per click driving the growth of the search business.

Online game revenue for the third quarter of 2015 was $153 million, unchanged from the same period in 2014 and down 12% from the previous quarter. The month-on-month decline was mainly due to the natural development laws of mobile games, the natural decline in revenue of "Dragon Babu 3D", and the completion of the transaction delivery on Seventh Avenue.

Other income was US$70 million in the third quarter of 2015, compared with US$33 million in the same period in 2014, and US$35 million in the previous quarter. In the third quarter of 2015, we confirmed net income of $29 million from the movie Pancake Man.

Gross profit margin

In the third quarter of 2015, both GAAP and non-GAAP gross profit margins were 59%, both were 58% in the same period in 2014, and both were 55% in the previous quarter.

In the third quarter of 2015, both GAAP and non-GAAP gross margins of online advertising business were 49%, both 48% in the same period in 2014, and both 45% in the previous quarter.

In the third quarter of 2015, both the GAAP and non-GAAP gross profit margins of the brand advertising business were 40%, both 44% in the same period in 2014, and both 34% in the previous quarter. The year-on-year decrease in gross profit margin was mainly due to the increase in video content costs. The month-on-month increase in gross profit margin was mainly due to the decline in video content costs.

The gross profit margins of search and search-related businesses in the third quarter of 2015 were both 58%, 53% in the same period in 2014, and 57% in the previous quarter. The year-on-year increase in gross profit margin was mainly due to the increase in revenue and the lower proportion of costs in search and search-related business revenue.

Both GAAP and non-GAAP gross profit margins of the online game business were 77% in the third quarter of 2015, 77% in the same period in 2014, and 75% in the previous quarter. The month-on-month increase in gross profit margin was mainly due to the decrease in the proportion of mobile game revenue, which led to a decrease in the corresponding revenue sharing costs.

Operating expenses

Operating expenses for the third quarter of 2015 were US$265 million, a decrease of 8% from the same period in 2014 and an increase of 4% from the previous quarter. Non-GAAP operating expenses were $267 million, a decrease of 3% from the same period in 2014 and a 13% increase from the previous quarter. In the third quarter of 2015, we recognized US$40 million in impairment of goodwill and impairment charges on intangible assets related to mergers and acquisitions, mainly related to the Changyou Dolphin Browser business.

Operating profit

Operating profit for the third quarter of 2015 was US$43 million, compared with US$41 million for the same period in 2014, and operating profit for the previous quarter was US$18 million.

Non-GAAP operating profit for the third quarter of 2015 was US$41 million, compared with US$26 million for the same period in 2014, and operating profit for the previous quarter was US$36 million.

Other income

Other income for the third quarter of 2015 was US$70 million, compared with US$0.9 million for the same period in 2014, and other expenses for the previous quarter were US$0.4 million. Other earnings for the third quarter of 2015 include one-time gains from the disposal of Changyou's web game business, Seventh Avenue.

Income tax expenses

In the third quarter of 2015, both U.S. GAAP and non-GAAP income tax expenses were US$29 million. In the same period in 2014, income tax expenses were US$1 million. In the previous quarter, income tax expenses were US$12 million.

Before

deducting net profit attributable to minority shareholders and deemed dividends attributable to Sogou Class A preferred shareholders, the U.S. GAAP net profit for the third quarter of 2015 was US$93 million, compared with a net loss of US$32 million for the same period in 2014. Net profit for the previous quarter was US$11 million. Before deducting net profit attributable to minority shareholders, non-GAAP net income for the third quarter of 2015 was US$91 million, compared with a net loss of US$17 million for the same period in 2014, and net income for the previous quarter was US$30 million.

The GAAP net income attributable to Sohu Company in the third quarter of 2015 was US$39 million, and the GAAP net income per diluted share was US$1.00. The net loss for the same period in 2014 was US$28 million. The net loss for the previous quarter was US$28 million. Non-GAAP net income attributable to Sohu for the third quarter of 2015 was US$49 million, and non-GAAP diluted net income per share was US$1.27. The net loss for the same period in 2014 was US$23 million. The net loss for the previous quarter was US$14 million.

Capital liquidity

As of September 30, 2015, Sohu Group's cash and cash equivalents and short-term investments totaled US$1.33 billion, with a balance of US$1.07 billion as of December 31, 2014.

Ms. Yu Chuyuan, President and Chief Financial Officer of Sohu Company, said,"Sohu Group's Sogou and Changyou continue to contribute considerable revenue and profits. Sohu Video continues to rationalize spending on top content and strives to expand higher-quality and better effective homemade and PGC content. All these improvements, coupled with our strong balance sheet, allow Sohu Group to remain competitive in China's Internet industry."

Business Outlook

Sohu predicts the fourth quarter of 2015:

total revenue between US$435 million and US$465 million. Brand advertising revenue ranged from $135 million to $145 million, down 4% to 11% from the third quarter of 2015 and 2% to 9% from the same period in 2014. Sohu Media platform revenue accounts for 34% to 36% of total brand advertising revenue. Sohu video advertising revenue accounts for 35% to 38% of total brand advertising revenue. Sogou's revenue ranged from US$165 million to US$175 million, an increase of 2% to 8% from the third quarter of 2015 and an increase of 38% to 47% from the same period in 2014. Online game revenue ranged from $115 million to $125 million, down 18% to 25% from the third quarter of 2015 and 32% to 38% from the same period in 2014. Before deducting non-GAAP net income attributable to minority shareholders, non-GAAP net income is between $10 million and $20 million. The non-GAAP net loss attributable to Sohu ranged from $15 million to $25 million. Non-GAAP diluted net loss per share ranged from $0.40 to $0.65. On the assumption that no new equity incentives will be issued, Sohu expects equity incentive fees to be between US$13 million and US$14 million. The GAAP net loss attributable to Sohu is between $25 million and $35 million, and the GAAP net diluted loss per share is between $0.65 and $0.90.

Editor: vian