Sohu posts 32pc drop in profits
Sherman So and Jeff Pao
Portal suffers from shrinking online advertising profit margins and declining sales of wireless services
Shares in Sohu.com, the second-largest online portal in China, tumbled after the company said fourth-quarter profit fell 32 per cent amid a declining profit margin in online advertising and deteriorating sales of wireless services.
The shares fell almost 8 per cent to US$24.50 in after-hours trade on the Nasdaq.
The Beijing-based company reported net profit of US$6.07 million, or 16 US cents per share, for the three months to December, compared with US$8.93 million for the same period last year.
Total revenue grew 15 per cent to US$34.3 million from US$29.6 million a year earlier.
Net income was US$65 million, or 17 US cents per share, on total revenue of about US$35.5 million.
'The gross margin in its online brand advertising decreased because of higher content cost,' said JP Morgan internet analyst Dick Wei. Online brand advertising accounted for 64 per cent of Sohu's revenue.
Sohu is spending money on acquiring premium content to compete with larger rival Sina, which is noted for its news coverage.
Revenue from brand advertising rose 30 per cent to US$22 million from the fourth quarter of 2005, accounting for 64 per cent of total sales compared with 57 per cent a year earlier.
However, expenses from product development rose 40 per cent to US$4.99 million, boosting total operating expenses 16 per cent to US$16 million.
'Sohu is trying to build up followers in sport,' Mr Wei said. 'It entered into exclusive contracts for NBA, China Interactive Sports and the Beijing Olympics.'
While the contracts might pave the way for higher revenue in future, Sohu's gross margin for online brand advertising fell to 68 per cent from 75 per cent a year earlier.
Meanwhile, Sohu's wireless business was still suffering from China Mobile's user protection policies imposed last year, said Mr Wei.
Sales of wireless services dropped to US$6.75 million from US$7.24 million a year earlier. Wireless-related sales accounted for 19.7 per cent of Sohu's revenue, compared with 24.4 per cent a year ago.
In July last year, China Mobile imposed news rules to protect users' right, such as double confirmation on subscriptions to valued-added services. The measures cut the number of new subscribers and caused more existing subscribers to terminate their services for many wireless valued added providers, such as Sohu.
The company estimated first-quarter total revenue at US$32 million to US$34 million.
For the full year to December, net income dropped 13 per cent to US$25 million from 2005 while revenue rose 28 per cent to US$134.2 million.