Form 8-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): February 3, 2013

 

 

SOHU.COM INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   0-30961   98-0204667

(State or other jurisdiction

Of incorporation)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

Level 15, Sohu.com Internet Plaza

No. 1 Unit Zhongguancun East Road, Haidian District

Beijing 100084

People’s Republic of China

(011) 8610-6272-6666

(Address, including zip code, of registrant’s principal executive offices and registrant’s telephone number, including area code)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 


Item 1.02 Termination of a Material Definitive Agreement.

Effective February 3, 2013, in connection with the change in the duties of Mr. Xiaochuan Wang, who had been the registrant’s Chief Technology Officer, described in Item 5.02 below, the employment agreement dated as of November 21, 2012 between Mr. Wang and the registrant, pursuant to which Mr. Wang had been employed and compensated by Sohu.com Inc., was terminated.

 

Item 2.02 Results of Operations and Financial Condition.

On February 4, 2013, the registrant announced its unaudited financial results for the fourth quarter ended December 31, 2012. A copy of the press release issued by the registrant regarding the foregoing is filed herewith as Exhibit 99.1 and is incorporated herein by reference.

 

Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

Effective February 3, 2013, Mr. Xiaochuan Wang resigned from his position as the Chief Technology Officer of Sohu.com Inc. Mr. Wang will instead devote his full working time to his existing position as the Chief Executive Officer of the registrant’s majority-owned subsidiary Sogou Inc., and will no longer act in his former capacity of being both Sohu.com Inc.’s Chief Technology Officer and Sogou Inc.’s Chief Executive Officer. Reflecting the change in Mr. Wang’s title and responsibilities, Mr. Wang will no longer be an executive officer of Sohu.com Inc.

 

Item 9.01 Financial Statements and Exhibits.

 

(c) Exhibits.

 

99.1 Press Release dated February 4, 2013

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

DATED: February 5, 2013     SOHU.COM INC.
    By:  

/S/    CAROL YU        

      Carol Yu
      Co-President and Chief Financial Officer

 

3

EX-99.1

Exhibit 99.1

 

LOGO

SOHU.COM REPORTS FOURTH QUARTER AND FISCAL YEAR 2012 UNAUDITED FINANCIAL RESULTS

Fourth Quarter of 2012:

Record Total Revenues of US$299 Million, Up 22% Year-over-Year and 5% Quarter-over-Quarter, Exceeding the High End of Group Guidance by US$6 Million;

GAAP Fully Diluted EPS of US60 Cents; Non-GAAP Fully Diluted EPS of US73 Cents, Exceeding the High End of Group Guidance by US8 Cents

Fiscal Year 2012:

Record Total Revenues of US$1,067 Million, Up 25% Year-over-Year

GAAP Fully Diluted EPS of US$2.03; Non-GAAP Fully Diluted EPS of US$2.54

BEIJING, CHINA, February 4, 2013 – Sohu.com Inc. (NASDAQ: SOHU), China’s leading online media, search, gaming, community and mobile service group, today reported unaudited financial results for the fourth quarter and fiscal year ended December 31, 2012.

Fourth Quarter Highlights

 

   

Record total revenues and record revenues in brand advertising, Sogou[1] and online game businesses.

 

   

Total revenues were US$299 million, up 22% year-over-year and 5% quarter-over-quarter.

 

   

Brand advertising revenues were US$82 million, up 6% year-over-year and 5% quarter-over-quarter.

 

   

Sogou revenues were US$41 million, up 78% year-over-year and 10% quarter-over-quarter.

 

   

Online game revenues were US$159 million, up 29% year-over-year and 5% quarter-over-quarter.

 

   

GAAP net income attributable to Sohu.com Inc. was US$23 million, or US$0.60 per fully diluted share. Non-GAAP net income attributable to Sohu.com Inc. was US$28 million, or US$0.73 per fully diluted share.

 

1


Fiscal Year 2012 Highlights

 

   

Record total revenues and record revenues in brand advertising, Sogou, and online game businesses.

 

   

Total revenues were US$1,067 million, up 25% year-over-year.

 

   

Brand advertising revenues were US$290 million, up 4% year-over-year.

 

   

Sogou revenues were US$131 million, up 108% year-over-year.

 

   

Online game revenues reached US$575 million, up 32% year-over-year.

 

   

GAAP net income attributable to Sohu.com Inc. was US$78 million, or US$2.03 per fully diluted share. Non-GAAP net income attributable to Sohu.com Inc. was US$98 million, or US$2.54 per fully diluted share.

Dr. Charles Zhang, Chairman and CEO of Sohu.com Inc. commented, “We ended 2012 with an encouraging fourth quarter. Looking at 2012, despite the slowdown in China’s economic growth, I’m pleased that the Sohu Group’s total annual revenues rose 25% year-on-year and surpassed the $1 billion mark for the first time in our history, setting an important milestone for the Sohu Group.”

Dr. Zhang added, “By business units, for online video, we achieved initial success of our newly established dedicated sales team as the business returned to growth in the fourth quarter, and we expect the performance to further accelerate in 2013. Sogou once again achieved triple-digit year-on-year revenue growth in 2012, and we were thrilled with some notable breakthrough products on the mobile side that have been well received by users. For Changyou, strong performance from both MMO and web games helped post a new record for revenues. ”

Ms. Belinda Wang, Co-President and COO added, “The recent data shows that the number of visitors and page views of Sohu.com homepage both grew about 25% in the past 12 months, demonstrating our position as one of the most influential online media in China. In the fourth quarter, our brand advertising revenues were at the high end of our prior guidance. This was mainly due to solid performance from the auto, online video and real estate sectors. In particular, we expect the sales growth momentum in our video business to continue in 2013.”

Fourth Quarter Financial Results

Revenues

Total revenues for the fourth quarter of 2012 were US$299 million, up 22% year-over-year and 5% quarter-over-quarter.

 

2


Total online advertising revenues, which include revenues from brand advertising and search and others businesses for the fourth quarter of 2012, were US$121 million, up 20% year-over-year and 7% quarter-over-quarter.

Brand advertising revenues for the fourth quarter of 2012 totaled US$82 million, up 6% year-over-year and 5% quarter-over-quarter. The increases were mainly contributed by the revenue increase derived from real estate advertisers.

Search and others revenues for the fourth quarter of 2012 were US$39 million, up 68% year-over-year and 10% quarter-over-quarter. The year-over-year increase was mainly contributed by pay-for-click services, as well as online marketing services on the Sogou Web Directory, both as a result of increased traffic and improved monetization of traffic.

Online game revenues for the fourth quarter of 2012 were US$159 million, up 29% year-over-year and 5% quarter-over-quarter.

Wireless revenues for the fourth quarter of 2012 were US$13 million, down 13% year-over-year and 12% quarter-over-quarter. The decreases were mainly due to the influence of new operator policies to reduce customer complaints.

Gross Margin

Both GAAP and non-GAAP gross margin was 69% for the fourth quarter of 2012, compared with 66% in the third quarter of 2012 and 71% in the fourth quarter of 2011.

Online advertising gross margin for the fourth quarter of 2012 was 52%, compared with 49% in the third quarter of 2012 and 59% in the fourth quarter of 2011. Non-GAAP online advertising gross margin for the fourth quarter of 2012 was 53%, compared with 50% in the third quarter of 2012 and 59% in the fourth quarter of 2011.

Both GAAP and non-GAAP gross margin for brand advertising in the fourth quarter of 2012 was 56%, compared with 52% in the third quarter of 2012 and 61% in the fourth quarter of 2011. The year-over-year decrease in gross margin was primarily due to increases in content and bandwidth costs. The quarter-over-quarter increase in gross margin was primarily due to decrease in content costs.

Both GAAP and non-GAAP gross margin for search and others business in the fourth quarter of 2012 were 44%, compared with 44% in the third quarter of 2012 and 53% in the fourth quarter of 2011. The year-over-year decrease in margin was mainly due to higher traffic acquisition costs.

Both GAAP and non-GAAP gross margin for online games in the fourth quarter of 2012 were 86%, compared with 86% in the third quarter of 2012 and 87% in the fourth quarter of 2011.

Both GAAP and non-GAAP gross margin for the wireless business for the fourth quarter of 2012 were 34%, compared with 34% in the third quarter of 2012 and 37% in the fourth quarter of 2011. The year-over-year decrease was primarily due to increased revenue sharing rate with partners.

 

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Operating Expenses

For the fourth quarter of 2012, operating expenses totaled $142 million, up 12% year-over-year and 13% quarter-over-quarter. Non-GAAP operating expenses were $138 million, up 46% year-over-year and 14% quarter-over-quarter. Both the year-over-year and quarter-over-quarter increases were primarily due to an increase in salaries and compensation expenses as a result of increased headcount, and higher expenses associated with marketing and promotion activities.

Operating Profit

Operating profit for the fourth quarter of 2012 was US$64 million, up 33% year-over-year and up 1% quarter-over-quarter. Operating margin was 22% for the fourth quarter of 2012, compared with 22% in the previous quarter and 20% in the fourth quarter of 2011.

Non-GAAP operating profit for the fourth quarter of 2012 was US$68 million, down 15% year-over-year and up 1% quarter-over-quarter. Non-GAAP operating margin was 23% for the fourth quarter of 2012, compared with 24% in the previous quarter and 33% in the fourth quarter of 2011.

Income Tax Expense

For the fourth quarter of 2012, GAAP income tax expense was US$20 million. Excluding a non-cash income tax expense of US$2 million recorded for the utilization of tax benefits from excess tax deductions related to share-based awards, non-GAAP income tax expense was US$18 million, compared with US$18 million in the previous quarter.

Net Income

Before deducting the share of net income pertaining to the Non-controlling Interest, GAAP net income for the fourth quarter of 2012 was US$51 million, up 8% year-over-year and down 1% quarter-over-quarter. Non-GAAP net income for the fourth quarter of 2012 was US$57 million, down 26% year-over-year and 3% quarter-over-quarter.

GAAP net income attributable to Sohu.com Inc. for the fourth quarter of 2012 was US$23 million, or US$0.60 per fully diluted share, down 9% year-over-year and 4% quarter-over-quarter. Non-GAAP net income attributable to Sohu.com Inc. for the fourth quarter of 2012 was US$28 million, or US$0.73 per fully diluted share, down 47% year-over-year and 4% quarter-over-quarter.

Cash Balance

As of December 31, 2012, Sohu Group had cash and cash equivalents of US$834 million, compared with US$733 million as of December 31, 2011.

Fiscal Year 2012 Financial Results

Revenues

Total revenues for fiscal year 2012 were US$1,067 million, up 25% compared with 2011.

 

4


Total online advertising revenues, which include revenues from brand advertising and search and others businesses for fiscal year 2012 were US$415 million, up 21% compared with 2011.

Brand advertising revenues for fiscal year 2012 were US$290 million, up 4% compared with 2011. The year-over-year increase was mainly contributed by the revenue increase derived from the fast-moving consumer goods (“FMCG”) advertisers.

Search and others revenues for fiscal year 2012 were US$124 million, up 98% compared with 2011. The year-over-year increase was mainly contributed by pay-for-click services, as well as online marketing services on the Sogou Web Directory, both as a result of increased traffic and improved monetization of traffic.

Online game revenues for fiscal year 2012 were US$575 million, up 32% compared with 2011.

Wireless revenues for fiscal year 2012 were US$56 million, up 7% compared with 2011.

Gross Margin

Both GAAP and non-GAAP gross margin was 65% for fiscal year 2012, compared with GAAP and non-GAAP gross margin of 72% in 2011.

Both GAAP and non-GAAP gross margin for online advertising gross margin for fiscal year 2012 was 44%, compared with GAAP gross margin of 58% and non-GAAP gross margin of 59% in 2011.

Brand advertising gross margin for fiscal year 2012 was 44%, compared with 62% in 2011. Non-GAAP brand advertising gross margin for fiscal year 2012 was 45%, compared with 62% in 2011. The decreases in gross margin were primarily due to increases in content and bandwidth costs, including the impairment loss recognized for the video content related long-lived assets in the second quarter of 2012.

Both GAAP and non-GAAP gross margin for search and others business for fiscal year 2012 were 43%, compared with 44% in 2011.

Both GAAP and non-GAAP gross margin for online games for fiscal year 2012 were 86%, compared with 89% in 2011.

Both GAAP and non-GAAP gross margin for the wireless business for fiscal year 2012 were 34%, compared with 39% in 2011. The decline was primarily due to increased revenue sharing rate with partners.

Operating Expenses

For fiscal year 2012, operating expenses totaled US$474 million, up 33% compared with 2011. Non-GAAP operating expenses were US$458 million, up 46% compared with 2011. The year-over-year increase was primarily due to an increase in salaries and compensation expenses as a result of increased headcount and higher expenses associated with marketing and promotion activities.

 

5


Operating Profit

Operating profit for fiscal year 2012 was US$223 million, down 12% compared with 2011. Operating margin was 21% for fiscal year 2012, compared with 30% in 2011.

Non-GAAP operating profit for fiscal year 2012 was US$240 million, down 20% compared with 2011. Non-GAAP operating margin was 23% for fiscal year 2012, compared with 35% in 2011.

Income Tax Expense

For fiscal year 2012, GAAP income tax expense was US$76 million. Excluding a non-cash income tax expense of US$5.6 million recorded for the utilization of tax benefits from excess tax deductions related to share-based awards and deferred tax liability impact on intangible asset impairment of US$0.6 million, non-GAAP income tax expense was US$71 million.

Net Income

Before deducting the share of net income pertaining to the Non-controlling Interest, GAAP net income for fiscal year 2012 was US$177 million, down 22% compared with 2011. Non-GAAP net income for fiscal year 2012 was US$201 million, down 26% compared with 2011.

GAAP net income attributable to Sohu.com Inc. for fiscal year 2012 was US$78 million, or US$2.03 per fully diluted share, down 49% compared with 2011. Non-GAAP net income attributable to Sohu.com Inc. for fiscal year 2012 was US$98 million, or US$2.54 per fully diluted share, down 49% compared with 2011.

Ms. Carol Yu, Co-President and CFO of Sohu.com Inc. commented, “We are delighted that in 2012, the efforts made by each of our business units strengthened their respective market positions. For 2013, we will continue to invest in key initiatives to capture the great opportunities ahead of us.”

Supplementary Information for Online Game Results

Fourth Quarter 2012 Operational Results

 

 

Aggregate registered accounts for Changyou’s games[2], excluding 7Road’s games, increased 41% year-over-year and 11% quarter-over-quarter to 248.1 million.

 

 

Aggregate peak concurrent users (“PCU”) for Changyou’s games, excluding 7Road’s games, decreased 6% year-over-year and increased 1% quarter-over-quarter to 1.10 million.

 

 

Aggregate active paying accounts (“APA”) for Changyou’s games, excluding 7Road’s games, decreased 31% year-over-year and 9% quarter-over-quarter to 2.20 million. The year-over-year and quarter-over-quarter decreases reflected a decline in the number of low-spending active paying accounts that did not make a purchase in the fourth quarter of 2012 as Changyou continued the strategy of the previous two quarters of giving away virtual items and reducing in-game promotions in TLBB.

 

 

Average revenue per active paying account (“ARPU”) for Changyou’s games, excluding 7Road’s games, increased 60% year-over-year and 11% quarter-over-quarter to RMB353. The year-over-year and quarter-over-quarter increases were mainly due to the decline in TLBB’s low-spending active paying accounts and TLBB’s advanced level players increasing their spending in the fourth quarter of 2012.

 

6


Business Outlook

For the first quarter of 2013, Sohu estimates:

 

   

Total revenues to be between US$290 million and US$299 million.

 

   

Brand advertising revenues to be between $78 million and $80 million; this implies a sequential decrease of 2% to 5% and an annual increase of 28% to 31%.

 

   

Sogou revenues to be between $34 million and $36 million; this implies a sequential decrease of 12% to 17% and an annual growth of 50% to 59%.

 

   

Online game revenues to be between US$160 million and US$165 million. This implies a sequential increase of 1% to 4% and an annual growth of 26% to 29%.

 

   

Before deducting the share of non-GAAP net income pertaining to the Non-Controlling interest, non-GAAP net income to be between US$46 million and US$49 million.

 

   

Non-GAAP net income attributable to Sohu.com Inc. to be between US$19 million and US$21 million, and non-GAAP fully diluted earnings per share to be between US$0.50 and US$0.55.

 

   

Assuming no new grants of share-based awards, we estimate that compensation expenses and income tax expenses relating to share-based awards to be around US$3 million to US$4 million. The estimated impact of this expense is expected to reduce Sohu’s fully diluted earnings per share for the first quarter of 2013 under US GAAP by 9 to 11 US cents.

Re-defined Responsibilities of Xiaochuan Wang

Given the growing significance of Sogou and the substantial size of its operations, Mr. Xiaochuan Wang will focus full-time as the Chief Executive Officer of Sogou, and will no longer act in the capacity of Sohu Group’s Chief Technology Officer.

Non-GAAP Disclosure

Beginning in the fourth quarter of 2011, Sohu revised its non-GAAP reporting methodology to exclude income/expense from the adjustment of contingent consideration, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact, in addition to its historical practice of excluding share-based awards from non-GAAP results.

To supplement the unaudited consolidated financial statements presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), Sohu’s management uses non-GAAP measures of gross profit, operating profit, income tax expense, net income attributable to Sohu.com Inc. and net income attributable to Sohu.com Inc. per share, which are adjusted from results based on GAAP to exclude the impact of share-based awards, which consist mainly of share-based compensation expenses and non-cash tax benefits from excess tax deductions related to share-based awards, income/expense from the adjustment of contingent consideration previously recorded for acquisitions and goodwill impairment and impairment of intangibles via acquisitions of businesses and the related tax impacts. These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results.

 

7


Sohu’s management believes excluding the impact of share-based awards, non-cash tax benefits from excess tax deductions related to share-based awards, income/expense from the adjustment of contingent consideration, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact from its non-GAAP financial measure is useful for itself and investors. Further, the impact of share-based awards, utilization of non-cash tax benefits from excess tax deductions related to share-based awards, income/expense from the adjustment of contingent consideration, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact cannot be anticipated by management and business line leaders and these expenses were not built into the annual budgets and quarterly forecasts, which have been the basis for information Sohu provides to analysts and investors as guidance for future operating performance. As the impact of share-based awards, non-cash tax benefits from excess tax deductions related to share-based awards, income/expense from the adjustment of contingent consideration, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact does not involve subsequent cash outflow, Sohu does not factor this in when evaluating and approving expenditures or when determining the allocation of its resources to its business segments. As a result, in general, the monthly financial results for internal reporting and any performance measure for commissions and bonuses are based on non-GAAP financial measures that exclude the impact of share-based awards, non-cash tax benefits from excess tax deductions related to share-based awards, income/expense from the adjustment of contingent consideration, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact.

The non-GAAP financial measures are provided to enhance investors’ overall understanding of Sohu’s current financial performance and prospects for the future. A limitation of using non-GAAP gross profit, operating profit, income tax expense, net income attributable to Sohu.com Inc. and net income attributable to Sohu.com Inc. per share, excluding the impact of share-based awards, non-cash tax benefits from excess tax deductions related to share-based awards, income/expense from the adjustment of contingent consideration, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact is that the impact of share-based awards and non-cash tax benefits from excess tax deductions related to share-based awards have been and will continue to be a significant recurring expense in Sohu’s business for the foreseeable future, income/expense from the adjustment of contingent consideration, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact may recur in the future. In order to mitigate these limitations Sohu has provided specific information regarding the GAAP amounts excluded from each non-GAAP measure. The accompanying tables include details on the reconciliation between the GAAP financial measures that are most directly comparable to the non-GAAP financial measures that have been presented.

Notes to Financial Information

Financial information in this press release other than the information indicated as being non-GAAP is derived from Sohu’s unaudited interim financial statements prepared in accordance with GAAP.

Mezzanine equity consists of non-controlling interests in 7Road and a put option that gives the non-controlling shareholders the right to put their shares to Changyou at a pre-determined price if 7Road achieves specified performance milestones before the expiry of the put option and 7Road does not complete an initial public offering on NASDAQ, the New York Stock Exchange or The Stock Exchange of Hong Kong. The put option will expire in 2014. Non-controlling interests of 7Road and the put option are classified as mezzanine equity in Changyou’s consolidated balance sheets, as redemption of the non-controlling interests is not solely within the control of Changyou.

 

8


In accordance with ASC subtopic 480-10, Changyou accretes the balance of non-controlling interests to its redemption value over the period from the date of the 7Road acquisition to the earliest exercise date of the put right. Any subsequent changes in the redemption value are considered to be changes in accounting estimates and are also recognized over the same period as net income attributable to mezzanine classified non-controlling interests.

In the third quarter of 2012, Changyou estimated that based on 7Road’s performance in the first three quarters of 2012, 7Road will likely exceed its originally estimated performance for year 2012 and 2013, which will be the basis to determine the exercise price of the put option. As a result, the Company has increased the estimated redemption value of the mezzanine classified non-controlling interests in 7Road. The increase in the redemption value was recognized prospectively over the period from the date of the change in estimate to the earliest exercise date of the put right as an increase in net income attributable to mezzanine classified non-controlling interests.

Safe Harbor Statement

This announcement contains forward-looking statements. It is currently expected that the Business Outlook will not be updated until release of Sohu’s next quarterly earnings announcement; however, Sohu reserves right to update its Business Outlook at any time for any reason. Statements that are not historical facts, including statements about Sohu’s beliefs and expectations, are forward-looking statements. These statements are based on current plans, estimates and projections, and therefore you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Potential risks and uncertainties include, but are not limited to, the current global financial and credit markets crisis and its potential impact on the Chinese economy, the uncertain regulatory landscape in the People’s Republic of China, fluctuations in Sohu’s quarterly operating results, and Sohu’s reliance on online advertising sales, online games and wireless services (most wireless revenues are collected from a few mobile network operators) for its revenues. Further information regarding these and other risks is included in Sohu’s annual report on Form 10-K for the year ended December 31, 2011, and other filings with the Securities and Exchange Commission.

Conference Call and Webcast

Sohu’s management team will host a conference call on the same day at 8:30 a.m. U.S. Eastern Time, February 4, 2013 (9:30 p.m. Beijing/Hong Kong time, February 4, 2013) following the quarterly and fiscal year results announcement.

The dial-in details for the live conference call are:

 

US Toll-Free:    +1-866-519-4004   
International:    +1-718-354-1231   
Hong Kong:    +852-2475-0994   
China Mainland    +86-800-819-0121 / +86-400-620-8038   
Passcode:    SOHU   

Please dial in 10 minutes before the call is scheduled to begin and provide the passcode to join the call.

 

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A telephone replay of the call will be available after the conclusion of the conference call at 10:30 a.m. Eastern Time on February 4 through February 11, 2013. The dial-in details for the telephone replay are:

 

International:    +1-646-254-3697   
Passcode:    89774802   

The live webcast and archive of the conference call will be available on the Investor Relations section of Sohu’s website at http://corp.sohu.com/.

About Sohu.com

Sohu.com Inc. (NASDAQ: SOHU) is China’s premier online brand and indispensable to the daily life of millions of Chinese, providing a network of web properties and community based/web 2.0 products which offer the vast Sohu user community a broad array of choices regarding information, entertainment and communication. Sohu has built one of the most comprehensive matrices of Chinese language web properties and proprietary search engines, consisting of the mass portal and leading online media destination www.sohu.com; interactive search engine www.sogou.com; #1 games information portal www.17173.com; the top real estate website www.focus.cn; #1 online alumni club www.chinaren.com; wireless value-added services provider www.goodfeel.com.cn; leading online mapping service provider www.go2map.com; and developer and operator of online games www.changyou.com/en/.

Sohu corporate services consist of online brand advertising on its matrix of websites as well as bid listing and home page on its in-house developed search directory and engine. Sohu also offers wireless value-added services such as news, information, music, ringtone and picture content sent over mobile phones. Sohu’s online game subsidiary, Changyou.com (NASDAQ: CYOU) has a diverse portfolio of online games that includes Tian Long Ba Bu, one of the most popular massively multi-player online (“MMO”) games in China, and DDTank and Wartune (also known as Shen Qu), which are two popular web games in China. Sohu.com, established by Dr. Charles Zhang, one of China’s internet pioneers, is in its seventeen year of operation.

For investor and media inquiries, please contact:

In China:

 

Mr. Eric Yuan   
Sohu.com Inc.   
Tel:    +86 (10) 6272-6593   
E-mail:    ir@contact.sohu.com   

In the United States:

 

Mr. Jeff Bloker   
Christensen      
Tel:    +1 (480) 614-3003   
E-mail:    jbloker@ChristensenIR.com   

 

10


SOHU.COM INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

 

     Three Months Ended     Twelve Months
Ended
 
     Dec. 31,
2012
    Sep. 30,
2012
    Dec. 31,
2011
    Dec. 31,
2012
    Dec. 31,
2011
 

Revenues:

          

Online advertising

          

Brand advertising

   $ 82,051      $ 77,874      $ 77,736      $ 290,205      $ 279,189   

Search and others

     38,705        35,284        22,979        124,389        62,981   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     120,756        113,158        100,715        414,594        342,170   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Online games

     158,942        151,093        123,249        574,653        435,508   

Wireless

     12,632        14,312        14,456        55,893        52,015   

Others

     7,162        6,815        7,733        22,061        22,394   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     299,492        285,378        246,153        1,067,201        852,087   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues:

          

Online advertising

          

Brand advertising (includes stock-based compensation expense of $155, $150, $438, $324 and $1,908, respectively)

     35,864        37,476        30,449        161,195        107,391   

Search and others (includes stock-based compensation expense of $23, $21, $0, $87 and $0, respectively)

     21,572        19,736        10,779        70,628        35,144   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     57,436        57,212        41,228        231,823        142,535   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Online games (includes stock-based compensation expense of $44, $61, $29, $237 and $102, respectively)

     22,124        21,026        16,341        77,859        49,837   

Wireless (includes stock-based compensation expense of $0, $0, $0, $0 and $0, respectively)

     8,358        9,474        9,154        36,893        31,882   

Others (includes stock-based compensation expense of $0, $0, $0, $0 and $0, respectively)

     5,625        9,037        4,734        23,083        16,093   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     93,543        96,749        71,457        369,658        240,347   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     205,949        188,629        174,696        697,543        611,740   

Operating expenses:

          

Product development (includes stock-based compensation expense of $1,191, $1,316, $1,635, $5,210 and $6,461, respectively)

     52,432        46,994        34,612        181,359        112,617   

Sales and marketing (includes stock-based compensation expense of $536, $582, $859, $2,149 and $3,694, respectively)

     68,833        58,250        45,912        214,736        158,187   

General and administrative (includes stock-based compensation expense of $1,815, $1,713, $1,630, $5,959 and $6,487, respectively)

     20,275        19,666        18,126        75,243        59,126   

Goodwill impairment and impairment of acquired intangibles via acquisition of businesses

     —          —          27,511        2,906        27,511   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     141,540        124,910        126,161        474,244        357,441   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     64,409        63,719        48,535        223,299        254,299   

Other income/(expense)

     2,102        (111     4,561        5,422        9,799   

Interest income

     5,585        5,974        5,488        25,277        15,800   

Exchange difference

     (704     667        (499     (635     (5,003
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expenses

     71,392        70,249        58,085        253,363        274,895   

Income tax expense

     20,290        18,727        10,828        76,171        46,552   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

     51,102        51,522        47,257        177,192        228,343   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net income attributable to the mezzanine classified noncontrolling interest shareholders

     4,495        4,495        1,105        11,196        2,558   

Net income attributable to the noncontrolling interest shareholders

     21,219        21,146        19,295        78,837        63,044   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Sohu.com Inc.

     25,388        25,881        26,857        87,159        162,741   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per share attributable to Sohu.com Inc.

   $ $0.67      $ 0.68      $ $0.71      $ $2.29      $ $4.26   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing basic net income per share attributable to Sohu.com Inc.

     38,046        38,022        38,076        38,038        38,216   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per share attributable to Sohu.com Inc.

   $ $0.60      $ 0.63      $ $0.65      $ 2.03      $ 3.93   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing diluted net income per share attributable to Sohu.com Inc.

     38,393        38,344        38,574        38,392        38,761   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note:

 

(a) The classification of certain comparative figures of online advertising expenses has been changed to conform to the current period presentation.

 

11


SOHU.COM INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED, IN THOUSANDS)

 

     As of
Dec. 31, 2012
     As of
Dec. 31, 2011
 

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 833,535       $ 732,607   

Restricted time deposits

     116,140         —     

Short term investments

     54,901         17,560   

Investment in debt securities

     79,548         79,354   

Accounts receivable, net

     98,398         87,066   

Prepaid and other current assets

     49,256         53,894   
  

 

 

    

 

 

 

Total current assets

     1,231,778         970,481   
  

 

 

    

 

 

 

Fixed assets, net

     178,951         152,652   

Goodwill

     159,215         158,905   

Intangible assets, net

     70,054         69,762   

Restricted time deposits

     130,699         —     

Prepaid non-current assets

     291,643         270,282   

Other assets

     13,792         11,212   
  

 

 

    

 

 

 

Total assets

   $ 2,076,132       $ 1,633,294   
  

 

 

    

 

 

 

LIABILITIES

     

Current liabilities:

     

Accounts payable

   $ 61,429       $ 31,179   

Accrued liabilities

     117,029         95,409   

Receipts in advance and deferred revenue

     89,687         75,809   

Accrued salary and benefits

     61,722         45,300   

Taxes payable

     33,897         47,213   

Deferred tax liability

     11,878         —     

Short-term bank loans

     113,000         —     

Other short-term liabilities

     63,352         35,816   

Contingent consideration

     76         476   
  

 

 

    

 

 

 

Total current liabilities

   $ 552,070       $ 331,202   
  

 

 

    

 

 

 

Long-term accounts payable

     12,684         3,612   

Long-term bank loans

     126,353         —     

Deferred tax liabilities

     7,998         5,146   

Contingent consideration

     —           17,009   

Total long-term liabilities

   $ 147,035       $ 25,767   
  

 

 

    

 

 

 

Total liabilities

   $ 699,105       $ 356,969   
  

 

 

    

 

 

 

MEZZANINE EQUITY

     61,810         57,254   

SHAREHOLDERS’ EQUITY:

     

Sohu.com Inc. shareholders’ equity

     1,084,223         1,008,425   

Noncontrolling Interest

     230,994         210,646   
  

 

 

    

 

 

 

Total shareholders’ equity

   $ 1,315,217       $ 1,219,071   
  

 

 

    

 

 

 

Total liabilities, mezzanine equity and shareholders’

equity

   $ 2,076,132       $ 1,633,294   
  

 

 

    

 

 

 

 

12


SOHU.COM INC.

RECONCILIATIONS OF NON-GAAP RESULTS OF OPERATION MEASURES TO THE NEAREST COMPARABLE GAAP MEASURES

(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

 

     Three Months Ended Dec. 31, 2012     Three Months Ended Sep. 30, 2012     Three Months Ended Dec. 31, 2011  
     GAAP     Non-GAAP
Adjustments
    Non-GAAP     GAAP     Non-GAAP
Adjustments
    Non-GAAP     GAAP     Non-GAAP
Adjustments
    Non-GAAP  
       155  (a)          150  (a)          438  (a)   
    

 

 

       

 

 

       

 

 

   

Brand advertising gross profit

   $ 46,187        155        46,342      $ 40,398      $ 150      $ 40,548      $ 47,287      $ 438      $ 47,725   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Brand advertising gross margin

     56       56     52       52     61       61
  

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 
       23  (a)          21  (a)         
    

 

 

       

 

 

         

Search and others gross profit

   $ 17,133        23        17,156      $ 15,548      $ 21      $ 15,569      $ 12,200      $ —        $ 12,200   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Search and others gross margin

     44       44     44       44     53       53
  

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 
       178  (a)          171  (a)          438  (a)   
    

 

 

       

 

 

       

 

 

   

Online advertising gross profit

   $ 63,320        178        63,498      $ 55,946      $ 171      $ 56,117      $ 59,487      $ 438      $ 59,925   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Online advertising gross margin

     52       53     49       50     59       59
  

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 
       44  (a)          61  (a)          29  (a)   
    

 

 

       

 

 

       

 

 

   

Online games gross profit

   $ 136,818        44        136,862      $ 130,067      $ 61      $ 130,128      $ 106,908      $ 29      $ 106,937   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Online games gross margin

     86       86     86       86     87       87
  

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Wireless gross profit

   $ 4,274        —          4,274      $ 4,838      $ —        $ 4,838      $ 5,302      $ —        $ 5,302   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Wireless gross margin

     34       34     34       34     37       37
  

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Others gross profit

   $ 1,537        —          1,537      $ (2,222   $ —        $ (2,222   $ 2,999      $ —        $ 2,999   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Others gross margin

     21       21     -33       -33     39       39
  

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 
       222  (a)          232  (a)          467  (a)   
    

 

 

       

 

 

       

 

 

   

Gross profit

   $ 205,949        222        206,171      $ 188,629      $ 232      $ 188,861      $ 174,696      $ 467      $ 175,163   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     69       69     66       66     71       71
  

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 
                   4,591  (a)   
       3,764  (a)          3,843  (a)          27,511  (b)   
    

 

 

       

 

 

       

 

 

   

Operating profit

   $ 64,409        3,764        68,173      $ 63,719      $ 3,843      $ 67,562      $ 48,535      $ 32,102      $ 80,637   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     22       23     22       24     20       33
  

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 
                   4,591  (a)   
             3,843  (a)          26,539  (b)   
       3,764  (a)          973  (c)          1,610  (c)   
       2,099  (c)          2,195  (d)          (3,150 ) (d)   
    

 

 

       

 

 

       

 

 

   

Net income before Non-Controlling Interest

   $ 51,102        5,863        56,965      $ 51,522      $ 7,011      $ 58,533      $ 47,257      $ 29,590      $ 76,847   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                   3,573  (a)   
             3,043  (a)          24,635  (b)   
       3,061  (a)          973  (c)          1,610  (c)   
       2,099  (c)          1,471  (d)          (2,202 ) (d)   
    

 

 

       

 

 

       

 

 

   

Net income attributable to

Sohu.com Inc for diluted net income per share (e)

   $ 23,064        5,160        28,224      $ 24,015      $ 5,487      $ 29,502      $ 25,245      $ 27,616      $ 52,861   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per share attributable to Sohu.com Inc.

   $ 0.60          0.73      $ 0.63        $ 0.77      $ 0.65          1.36   
  

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Shares used in computing diluted net income per share attributable to Sohu.com Inc.

   $ 38,393          38,480        38,344          38,480        38,574          38,794   
  

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

 

13


Note:

 

(a) To eliminate the impact of share-based awards as measured using the fair value method.
(b) To adjust goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact.
(c) To adjust non-cash tax benefits from excess tax deductions related to share-based awards.
(d) To adjust income/expense from the adjustment of contingent consideration previously recorded for acquisitions.
(e) To adjust Sohu’s economic interest in Changyou and Sogou under the treasury stock method and if-converted method, respectively.
(f) The classification of certain comparative figures of online advertising expenses has been changed to conform to the current period presentation.

 

14


SOHU.COM INC.

RECONCILIATIONS OF NON-GAAP RESULTS OF OPERATION MEASURES TO THE NEAREST COMPARABLE GAAP MEASURES

(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

 

     Twelve Months Ended Dec. 31, 2012     Twelve Months Ended Dec. 31, 2011  
     GAAP     Non-GAAP
Adjustments
    Non-GAAP     GAAP     Non-GAAP
Adjustments
    Non-GAAP  
       324 (a)          1,908 (a)   
    

 

 

       

 

 

   

Brand advertising gross profit

   $ 129,010        324        129,334      $ 171,798      $ 1,908      $ 173,706   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Brand advertising gross margin

     44       45     62       62
  

 

 

     

 

 

   

 

 

     

 

 

 
       87 (a)         
    

 

 

         

Search and others gross profit

   $ 53,761        87        53,848      $ 27,837      $ —        $ 27,837   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Search and others gross margin

     43       43     44       44
  

 

 

     

 

 

   

 

 

     

 

 

 
       411 (a)          1,908 (a)   
    

 

 

       

 

 

   

Online advertising gross profit

   $ 182,771        411        183,182      $ 199,635      $ 1,908      $ 201,543   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Online advertising gross margin

     44       44     58       59
  

 

 

     

 

 

   

 

 

     

 

 

 
       237 (a)          102 (a)   
    

 

 

       

 

 

   

Online games gross profit

   $ 496,794        237        497,031      $ 385,671      $ 102      $ 385,773   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Online games gross margin

     86       86     89       89
  

 

 

     

 

 

   

 

 

     

 

 

 

Wireless gross profit

   $ 19,000        —          19,000      $ 20,133      $ —        $ 20,133   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Wireless gross margin

     34       34     39       39
  

 

 

     

 

 

   

 

 

     

 

 

 
            
          

 

 

   

Others gross profit

   $ (1,022     —          (1,022   $ 6,301      $ —        $ 6,301   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Others gross margin

     -5       -5     28       28
  

 

 

     

 

 

   

 

 

     

 

 

 
       648 (a)          2,010 (a)   
    

 

 

       

 

 

   

Gross profit

   $ 697,543        648        698,191      $ 611,740      $ 2,010      $ 613,750   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     65       65     72       72
  

 

 

     

 

 

   

 

 

     

 

 

 
       13,966 (a)          18,652 (a)   
       2,906 (b)          27,511 (b)   
    

 

 

       

 

 

   

Operating profit

   $ 223,299        16,872        240,171      $ 254,299      $ 46,163      $ 300,462   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     21       23     30       35
  

 

 

     

 

 

   

 

 

     

 

 

 
       13,966 (a)          18,652 (a)   
       2,268 (b)          26,539 (b)   
       5,591 (c)          3,011 (c)   
       2,195 (d)          (3,150 )(d)   
    

 

 

       

 

 

   

Net income before Non-Controlling Interest

   $ 177,192        24,020        201,212      $ 228,343      $ 45,052      $ 273,395   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
       11,094 (a)          15,322 (a)   
       1,520 (b)          24,635 (b)   
       5,591 (c)          3,011 (c)   
       1,471 (d)          (2,202 )(d)   
    

 

 

       

 

 

   

Net income attributable to Sohu.com Inc for diluted net income per share (e)

   $ 78,077        19,676        97,753      $ 152,528      $ 40,766      $ 193,294   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per share attributable to Sohu.com Inc.

   $ 2.03          2.54      $ 3.93        $ 4.96   
  

 

 

     

 

 

   

 

 

     

 

 

 

Shares used in computing diluted net income per share attributable to Sohu.com Inc.

     38,392          38,480        38,761          39,016   
  

 

 

     

 

 

   

 

 

     

 

 

 

 

15


Note:

 

(a) To eliminate the impact of share-based awards as measured using the fair value method.
(b) To adjust goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact.
(c) To adjust non-cash tax benefits from excess tax deductions related to share-based awards.
(d) To adjust income/expense from the adjustment of contingent consideration previously recorded for acquisitions.
(e) To adjust Sohu’s economic interest in Changyou and Sogou under the treasury stock method and if-converted method, respectively.
(f) The classification of certain comparative figures of online advertising expenses has been changed to conform to the current period presentation.

 

[1]

Sogou operates search and others business and offers Internet value-added services (“IVAS”) with respect to Web games developed by third-party developers. Search and others business include search and Sogou Web Directory. In statements of operations, revenues from search and Sogou Web Directory are recorded as “search and others” revenue, and revenue from IVAS is recorded as “others” revenue.

[2] 

Excludes 7Road’s games and comprises the following games operated in China: Tian Long Ba Bu (“TLBB”), Duke of Mount Deer (“DMD”), Blade Online, Blade Hero 2, Tao Yuan, Da Hua Shui Hu, Zhong Hua Ying Xiong, Immortal Faith, and Legend of Ancient World.

 

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