Sohu.com Inc:Hold,Future growth driven by Sogou and news app
Sogou and news app as the potential growth drivers. 3Q results were better thanexpected with revenue exceeding consensus by 5% and recurring operating marginreturning to breakeven for the first time since 1Q16. We believe Sogou, the searchsubsidiary of Sohu, and the AI-backed news app could be the future growth engine.
1) Sogou: In 3Q17, Sogou revenue growth further accelerated to 55% y-o-y,compared with 20% in 2Q and 10% in 1Q17. Growth was mainly driven by 24% y-o-ygrowth in traffic, of which mobile traffic grew more than 38% y-o-y. In 3Q, Tencentbegan testing the integration of Sogou Search into Weixin, which allows users toaccess all Internet information through Sogou general search function from Weixin.
The user base of Sogou Mobile Keyboard is expanding rapidly by 55% y-o-y. Goingforward, Sogou should continue to strengthen competitive advantages in search fromchannel to content, leveraging the partnership with Tencent. 2) News App: In 3Q,Sohu introduced more short video content to its news app and adjusted itsrecommendation algorithm, leveraging machine-learning technology. It will launch anew version of its News App in November with some innovative upgrades andimproved algorithms. The company expects an immediate 30% boost in page viewsafter launching the new version of the app. Sohu believes the healthy growth of SMEclients will help monetize the incremental growth in traffic.
Revenue beat; recurring operating margin reached breakeven. Total revenueamounted to USD516m, up 26% y-o-y, exceeding mid-range guidance by 4%. Thebrand advertising business remained weak with USD74m revenue, down 33% y-o-ydue to lacklustre video ad sales. Sogou revenue rose by 55% y-o-y to USD257m,with growth accelerating from 0% y-o-y in 2016, due to the low base since May 2016and technology improvement. Online game revenue amounted to USD132m, up 34%y-o-y. Operating margin excluding one-off impairment from Changyou was 2.3%,which is the first quarter above breakeven since 1Q16. Loss per share was USD2.38,compared with previous guidance of USD1.00-1.25, mainly due to offline impairment.
Raise TP to USD65 from USD62 and maintain Hold. We raise our 2017-19erevenue estimates by 3/8/8%, and revise up EPS to -USD6.70, +USD0.61, andUSD2.17 (from -USD5.41, -USD1.54, and USD0.53). Our SOTP-based TP of USD65implies potential upside of 11.5% and we maintain Hold on the stock, as the visibilityof Sohu’s business remains unclear. Key upside risk: Potential IPO of Sogou. Keydownside risk: competition from other search players.
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