Sohu’s Failed Evolution
In 2019, Sohu(NASDAQ:SOHU), a veteran Chinese internet company, had a negative profit, with Q1 revenue of $431 million, down 5.2% Year-On-Year(excluding currency fluctuations, up 1% YoY).
Although Q1 results were interpreted as positive by “professionals”, investors did not approve, and sohu’s share price fell from $20 to less than $14 after the results were released, leaving it with a market capitalization of just $540million (the share price was more than $70 at one point in October 2017). In Q1 2018, Sina’s revenue was only $475 million, up 7.8% year-on-year, not ideal.
But Sina’s “residual value” was $2.8 billion (in February 2018, the share price was more than $120 at one point), five times so much as Sohu’s. At that time, the “three major portals in China” (Netease, Sohu, Sina) have now become the revenue stagnation, the stock price downturn difficult brother.
A friend who is thinking about corporate evolution thinks that Buffett’s analysis of Coca-Cola’s framework is outdated and at least does little to reveal the competitiveness of Internet companies.
Under the combination of technological progress, social change, business model innovation, and many other factors, Internet enterprises have to complete evolution in products and business models every three to five years. There is no reliable theory that can explain the success or failure of the evolution of Internet enterprises, only to collect cases first. Sina’s evolution is not so successful, but it can count how unsuccessful Sohu is.
Similar size, market value disparity
In the last five years, Sohu’s revenue has been trapped in a “box” of $1.65 billion to $1.94 billion, with no signs of a breakthrough.
But Sohu’s old friend “Sina won’t fight Sohu until 2018:
In 2017, Sohu and Sina’s revenue was $1.86 billion and $1.58 billion, respectively, and Sina was equivalent to 85% of Sohu’s;
In 2018, Sina’s revenue reached $2.11 billion, or 112% of Sohu’s. This gap cannot be reached “Sohu left behind” conclusion.
Sohu and Sina’s revenue structure is also very similar in its evolution path:
Portal started, advertising was the most important way to realize, with the diversification of revenue, advertising revenue share decreased year by year.
By 2013, the share of brand advertising in Sohu’s revenue had fallen to 30%. Advertising brand revenue has also started to decline since 2016. In 2018, brand advertising revenue fell to $230 million, down 12.3 percent of revenue.
Green: Brand Advertising; Orange: Search; Blue: Online Games; Green Line: Ad Revenue Share
Sina’s “cash cow” has long since been lost. But the absolute amount of advertising revenue fell less than Sohu, and the main reason for the decline in revenue was the growth of weibo revenue.
In 2018, Sohu and Sina generated $230 million and $290 million in advertising revenue, respectively, representing 12.3% and 13.8% of their respective revenues.
Sina and Sohu have completed the evolution, the current advertising business in the business share of the company was reduced to about one-eighth of the company’s creation, and the two revenue amount is similar.
Ctrip, TongCheng (two major Chinese OTAs) in a very different style of capital markets listed, Ctrip profit, loss, but the market value of the two companies corresponding to the same value.
It can be seen how much the capital market attaches importance to revenue. But the story of Ctrip and The TongCheng has not been repeated in Sina and Sohu. This shows that in the eyes of investors, Sohu’s evolution compared with Sina is very poor.
But the story of Ctrip and TongCheng has not been repeated in Sina and Sohu. This shows that in the eyes of investors, Sohu’s evolution compared with Sina is very poor. One is That Sohu’s gross profit margin is not as good as Sina’s, and the other is that Sogou is not enough to become a one-sided subsidiary.
Measured by gross margin
Start-up business revenue growth is weak, diversification, “sinking to the rural market”, internationalization is all enterprises will take the responsibility. Sohu and Sina’s diversification strategy has been in progress for a decade, and now it is the only business expression that can disclose revenue separately in its earnings reports.
Sohu has search business, game business, Sina only weibo.
It is important to evaluate the success of the diversification strategy, first looking at how much revenue the new business contributes, especially to Internet companies. But the company is to make money, only contribute revenue does not contribute to the profit of the business is ultimately not good business. Therefore, when evaluating corporate diversification, old business, new business, and the company’s overall gross profit margin are indispensable indicators.
Sohu frustrated
By the video content of ultra-high cost drag, Sohu advertising business profitability is weak.
Changyou (Sohu’s game subsidiary) although not doing well, but for Sohu to contribute to the gross profit of the “main force”, and search business go hand in hand, but the gross profit margin is more than double.
In 2018, Changyou’s gross profit was $329 million, with a gross profit margin of 84.4%. In 2018, Sohu’s overall gross profit margin reached 43.1%, and it was a great achievement.
In 2016, Sohu’s advertising revenue was $448 million, down 22.4% YoY, while in 2017, Sohu’s advertising revenue was $314 million, down 29.9% YoY, while revenue costs (content, bandwidth, human resources, etc.) gross loss of $364 million, with a gross loss of $50 million, and revenue of $232 million in 2018, down 26.1% from a year earlier, but a gross profit of $47 million.
2017 was “hit hard”, Sohu fully realized that advertising is the drop. 2018 is a strategic abandonment, rather than “burning money” rather than first to save gross profits.
Weibo gross profit margin is higher than the gaming business
Sina’s advertising business has a gross profit margin of more than double that of Sohu, with a gross profit margin of $170 million and a gross profit margin of 59.4% in 2018. In the same year, Sohu’s advertising business made a gross profit of only $47 million.
In turn, the advertising business alone led Sohu’s gross profit by $217 million. Sina’s subsidiary Weibo’s profitability is more comparable than Sohu’s search.
In 2018, Weibo’s gross profit was $1.43 billion, with a gross profit margin of 83.7%.
In 2014, Sina’s gross profit margin exceeded Sohu’s. Sina’s previous profitability can be said to be “crushed by Sohu”.Since then, Sina’s gross profit margin has continued to rise, but the gross profit amount exceeds Sohu’s to 2017.
In 2018, Sina’s gross profit and gross profit margin were US$1.6 billion and 78.6%, respectively. Sohu’s gross profit was only $810 million, with a gross profit margin of 43.1%.
Why Sougo Can’t Graduate
On November 9, 2017, Sogou was officially listed on the New York Stock Exchange, becoming the second U.S.-listed company to be listed in the United States after Changyou. Counting Changyou, Zhang Chaoyang has gone to the United States three times to ring the bell.
On the day of the listing, Sogou had a market capitalization of more than $5 billion, or 2.5 times that of parent company Sohu.
Sohu CEO Zhang Chaoyang once said, “There are several listed companies that are not important, the market value is very important, more listed companies are what?”
Now Changyou, Sohu market value of $2.1 billion, Weibo $9.3 billion, Zhang Chaoyang unfortunately said.
Sohu’s market value is far inferior to Sina’s. The most intuitive reason is that Sogou itself is not successful enough.
Sogou search revenue about one-tenth of Baidu’s ‘big search’
As one of Sohu’s most important subsidiaries, Sogou’s main business is search engines. Speaking of China’s search engine, it is impossible not to mention Baidu.
Sogou’s revenue grew 37.5% in 2017, handing over the listed report card.
Growth slowed to 23.8% in 2018 and Q1 revenue fell 1.5% year-on-year to $250 million in 2019. In 2014, Sogou’s search business generated $358 million in revenue or 4.55 percent of Baidu’s advertising revenue.
Sogou search revenue exceeded $1 billion in 2018, equivalent to 8.37 percent of Baidu Search’s revenue. Excluding 9.33 billion yuan in advertising revenue from iqiyi, a subsidiary of Baidu’s video business, Baidu’s search revenue was $72.6 billion ($10.8 billion), and Sogou’s search revenue was equivalent to 9.47 percent of Baidu’s search revenue.
Lack of “independent personality”
The “major part” of Sogou’s revenue costs is the cost of traffic purchases (TAC).
TAC accounted for 29.3% of Sogou’s advertising revenue in 2018 and soared to 52.1% in 2018 (in 2018, Baidu TAC accounted for less than 14% of advertising revenue).
Sohu’s 2018 report revealed that 36% of search traffic (by page) came from Tencent. Roughly speaking: 100 yuan advertising revenue, 36 yuan is sent by Tencent; In this way, if there is no Tencent “relief”, Sogou search gross loss rate of more than 28% (spend 82 yuan to earn 64 yuan).
In 2019Q1, Sohu TAC accounted for 61.1% of the search business revenue, the situation is even worse. Sogou’s own traffic has been lost.
“ime — browser — search” constitutes a “three-stage rocket” may once be effective, now no Work!
“Victory artificial intelligence” is only on paper, research and development costs less than one-tenth of others, what to win Baidu?
In the past five years, Sogou search revenue equivalent to Baidu’s percentage has almost doubled, the reason why it can “tiger mouth to eat” mainly relies on Tencent.
On the other hand, Tencent can make Sogou search revenue a tenth of Baidu. And in the eyes of investors, there is no own flow of sogou worth only one-fifth of Baidu!
Don’t let Zhang Chaoyang “run away.”
At its closing price on June 17, Sohu, Sogou, and Changyou had market capitalizations of $560 million, $1.6 billion and $570 million, respectively.
Sohu’s shares in Sogou (45%) and Changyou (67.4%) have a combined market capitalization of $1.1 bn. As of March 31, 2019, Sohu held $260 million in cash and $850 million in short-term wealth management products, while its total liability was only $500 million.
It can be considered that Sohu can net $600 million in cash after paying off all of its debts.
Sohu also has a large “hidden asset”.
In 2007, Sohu paid $35.3 million for 183,000 square meters of office space in Tsinghua Science and Technology Park, one of The Most Expensive Areas in China, and $162 million for 413,000 square meters of office space in Beijing’s Zhichun Road in 2009 ( put into use in May 2013).
Changyou did not show weakness, in 2009, 33.4 million U.S. dollars to buy 15,000 square meters, in 2010 $171 million to buy 57,000 square meters (in December 2013 to put into use). The property mentioned above is included in the fixed assets at the cost price and depreciated year by year.
The book value of office space was reduced to $372 million at the end of 2018 after a book value of $417 million in 2014.
Beijing Zhongguancun’s core area of more than 130,000 square meters of office space, about 10,000 U.S. dollars per square meter, which is 1.3 billion U.S. dollars.
If Sohu were to wind up at this point, all the debt left behind $600 million in cash, $1.1 billion in stock, $1.3 billion in real estate, a total of $3 billion! Based on the current market value of Sohu privatization, 700 to 800 million U.S. dollars. Then half-sold half-delivered to clean up the department’s business (especially the money-burning video business).
Sogou, Changyou stocks can continue to hold, office buildings do not have to sell, rental words can sit in the hundreds of millions a year. Smart Zhang Chaoyang has already thought of this, he just wants to fight again, do not want to leave the Internet circle as a public. But he has a back way, and it is a very comfortable back road, which may be the root cause of Sohu’s evolutionary failure.
