Sohu.com Inc:Hold,Sogou in the spotlight

Sogou in the spotlight. Sohu reported solid results with 2Q17revenue and 3Q17guidance exceeding consensus by 7% and 6% respectively. Aside from a strongrevenue contribution from newly launched TLBB Legacy game, Sogou, the internetsearch services subsidiary of Sohu, is another key revenue driver. In 2Q17, Sogourevenue growth accelerated to 20% y-o-y, compared with 10% growth in 1Q17.

    Growth was mainly driven by 24% y-o-y growth in traffic, of which mobile traffic grewmore than 50% y-o-y. Going forward, management guides for revenue growth toaccelerate to 42% y-o-y in 3Q17. The company expects to further improve AI-relatedsearch functions, via integrating question-and-answer, voice inputs, and machinetranslation into core products. In the meantime, Sogou’s partnership with Tencent (700HK, HKD313.4, Buy) is also progressing well with cooperation in encyclopaedia(Sogou Baike and Wechat search) and smart devices (Sogou AI question-and-answersystem and Tencent smart device platform). Sogou aims to expand market share withmore aggressive user acquisition strategy in the future. Sogou also announced plansto submit files for a possible IPO, though valuation and timing haven’t been disclosedyet. As of 2Q17, Sogou accounts for 46% of Sohu Group’s total revenue. Sohou andTencent own 39% and 45% of Sogou’s stake respectively. Given that the videobusiness is still in transition to self-developed content and online game business maybe privatised, Sogou could be the only key growth driver for Sohu.

    Solid 2Q results and guidance. Total revenue amounted to USD461m, up 10% y-o-y,exceeding mid-range guidance by 6%. The brand advertising business remained weakwith USD86m revenue, down 24% y-o-y due to lacklustre video ad sales. Sogou revenuegrew 20% y-o-y to USD211m, rebounding from average growth of 10% y-o-y in 2016, dueto low basis since May 2016and techonology improvement. Online game revenue rose toUSD122m, up 23% y-o-y. Gross margins were 40%, down 970bps y-o-y, driven mostly bya one-off impairment charge of USD45m in video content. Loss per share was USD1.62,compared with previous guidance of USD1.80-2.00. For 3Q, management expects totalrevenue of USD480-510m, compared with consensus at USD465m.

    Raise TP to USD62from USD57; maintain Hold. We raise our 2017-19revenueestimates by 8-18%, and revise up our EPS to -USD5.41, -USD1.54, and USD0.53(from -USD6.99, -USD2.96, and -USD2.36) to factor in higher revenue contributionfrom Sogou. As a result our SOTP-based TP rises to USD62, which implies upside of9%. Key upside risk: Potential IPO of Sogou. Key downside risk: competition fromother search players.