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Sohu Falls on Profit Outlook Missing Estimates as Costs Rise

Sohu.com Inc. (SOHU), the owner of China’s second-largest online video site, declined the most in more than nine months after its first-quarter profit forecast trailed analysts’ estimates amid rising costs.

The shares fell 5.5 percent to $46.49 at the close in New York for the steepest slide since April 30. Sohu rose 4 percent this year through Feb. 1, compared with an 8.3 percent gain for Baidu Inc., operator of China’s largest Internet search engine.

Profit excluding some items probably will be 50 cents to 55 cents a share, the Beijing-based company said in a statement today. The average of five estimates on that basis was 77 cents, according to data compiled by Bloomberg. Labor and bandwidth costs are rising as the company grows and its traffic increases, “particularly on the video side,” Chief Financial Officer Carol Yu said on the earnings call.

After Sohu’s solid fourth-quarter results, those expenses held the profit forecast below expectations, Jiong Shao, an analyst at Macquarie Group in Hong Kong, said in an e-mail. He rates the shares outperform.

“Given the strategic importance of our video business, our commitment to the segment is unchanged,” Chairman and Chief Executive Officer Charles Zhang said on the call.

The video division should become profitable in 18 to 24 months, Yu said.

First-quarter sales will probably be $290 million to $299 million, the company said. That beat the $280 million average estimate.

Revenue Increase

Fourth-quarter revenue rose 22 percent to $299 million as Sohu lured more visitors to its main website, search engine and games. Brand advertising revenue was also at the high end of the company’s forecast, led by the auto, online video and real- estate segments, Co-President Belinda Wang said in the statement. Visitor numbers and page views at Sohu.com both grew about 25 percent in the past year, she said

The results “are encouraging despite the slowdown in China’s total growth,” Zhang said.

Fourth-quarter profit dropped 9 percent to $23 million. That exceeded the $21.2 million average of seven estimates compiled by Bloomberg. Operating expenses rose 12 percent to $142 million.

Sohu’s online games unit Changyou.com (CYOU) boosted fourth- quarter profit 17 percent to $75.2 million. The unit’s games include the Tian Long Ba Bu.

Alicia Yap, a Hong Kong-based analyst at Barclays Plc, said the video-game division will buoy Sohu’s sales in 2013.

“With solid momentum coming from Changyou gaming growth, we believe Sohu is likely to deliver relatively decent top-line growth,” she said in a report. Yap rates both Sohu and Changyou overweight.

The games division is “well positioned” to take advantage of its growing market in 2013, Zhang said. The division plans to release three new multiplayer games and a number of Web games this year.

To contact the reporter on this story: Lulu Yilun Chen in Hong Kong at ychen447@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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