This excerpt taken from the SOHU 8-K filed Aug 2, 2005.
Caro Yu, CFO:
Thank you Charles. I would like to take this opportunity to discuss some key financials to enhance your understanding of our business operations.
We are pleased to report revenues of $25.9 million for the second quarter came in at the high end of our guidance.
With advertising revenues of $17.0 million we experienced a healthy 14% sequential and 27% year-on-year improvement. Year-to-Date we are right on track of our original target to reach 30% growth in 2005 over 2004 for the entire advertising business. However, as Charles has explained, we are seeing some softness in the online advertising sector. As a result we are revising downwards our advertising growth projection to between 20 and 25% for the full year 2005.
We are very pleased to note that our wireless business is back on a growth track.
Let me give you a breakdown of the second quarter wireless revenue:
Our SMS services grew 5% quarter-on quarter to $3.5 million.
Our WAP services grew 2% to $2.1 million
Our IVR business grew 27% to $600,000.
Our MMS and RingBackTone services contribute only very small amounts.
Going forward we believe, barring any unforeseeable circumstances, we will continue to see a cautious recovery in our wireless business.
3. Other revenue:
Let me give you a brief explanation on the revenues from Go2Map, the online mapping company we have just acquired. As a result of the closing of the acquisition on May 31, we have consolidated the June Go2Map operations into our financial statements. Since the existing revenue of Go2Map is mainly comprised of software sales and rental of its map search engine, such revenue is classified as other revenue in the financial statements. For the one month ended June 30, 2005, the revenue of Go2Map was $201,000 with a net loss of $35,000, after deducting $48,000 as amortization of the intangibles that are recognized as a result of the acquisition.
II. Turning to our gross margins:
Overall gross margin of 67% in Q2 2005 was slightly down from 68% in the previous quarter and slightly up from 66% in Q2 2004. Advertising gross margin of 75% in Q2 was slightly down from 76% in Q1. We are pleased to note that gross advertising profit increased to $12.7 million from $11.3 million in Q1.
Non-advertising gross margin was 53% compared to 55% in Q1 2005 and 58% in Q2 last year. This is mostly due to Unicoms increasing its percentage share of SMS revenue and charging additional service fees for its marketing services. On the other hand, the e-commerce gross margin has improved because we added a new business model with SOHU acting as an agent instead of a primary obligator, and thus have started to record this revenue on a net basis instead of gross basis.
III. Operating expenses
For the second quarter of 2005, SOHUs operating expenses totaled $10.7 million, largely unchanged quarter-on-quarter but increased by 27% year-on-year. The year-on-year increase in operating expenses is mostly due to investment in long-term growth opportunities, the rise in sales and marketing spending, and the consolidation of operating expenses from two companies we acquired in May 2004 being Goodfeel and May 2005 being Go2Map.
IV. Operating Profit Margin
Operating profit margin of 26% was up from 23% in Q1 2005 as our operations have improved quarter-on-quarter, but down from 35% in the same period last year. We are still in the build-up phase of a very promising but competitive market, therefore we need to continue to invest in the future growth of the company.
V. Balance Sheet.
Let me now make a few comments on the Balance Sheet.
Our DSO for Q2 is 81 days compared to 79 days in Q1 (74 days in Q4). Advertising DSO for Q2 is 89 days, down from 93 days in Q1 (92 days in Q4). Our June 30 net accounts receivable balance was $ 21.5 million compared to $19.1 million in Q1, ($19.9 million in Q4), including $13.4 million related to our advertising business and $7.4 million for our wireless business.
Our bad debt provision for advertising as of June 30, 2005 amounted to $1.6 million, a reduction from the $1.7 million provision as of March 31, 2005. While we consider this level of bad debt provision to be relatively low as compared to our level of advertising sales, we pay particular attention to continue to be prudent in our credit extension policy. Given the financial difficulties of some of our clients in South China we have tightened our credit policy and we actually saw improvement over bad debt provision in Q2 compared to Q1.
As in the past, we had regular collections from our mobile operators. We have never had a bad debt from a mobile operator. To illustrate this, I am pleased to inform you that yesterday we received $3.2 million from China Mobile as settlement of its receivables due to Goodfeel as of June 30, 2005.
VI. And finally, the Business Outlook
You will find detailed guidance for the third quarter in our earnings release. Here I would like to discuss the effect of the RMB revaluation in more detail.
in a gain of approximately $2 million. However this so-called gain is recorded as an equity item on the balance sheet and has no impact on our profit and loss account. Accordingly, no such gain has been included in our guidance.
Let me emphasize that while we see some new challenges in our brand advertising outlook that causes us to lower our outlook for advertising revenues in the second half of the year, our sponsored search business continues to be a bright spot for SOHU. At the same time we expect to see a continuing recovery in our wireless business. We are confident in the long-term future of SOHU.
That concludes my presentation. Thank you for your attention and now I would like to open the floor for questions. Operator?