This excerpt taken from the SOHU 8-K filed Apr 28, 2006.
Thank you Charles. I would like to take this opportunity to discuss some key financials for the first quarter 2006.
We are pleased to report strong record revenues of $31.3 million for the first quarter which exceeded our guidance.
With advertising revenues of $20.1 million, we experienced a marginal sequential decline of 1% and a year-on-year increase of 35%.
For our search revenues, bid-listing revenues accounted for 30% of our total sponsored search revenue, unchanged from the previous quarter.
We have been pleased to see a continued steady recovery of this business. Wireless revenues were $8.0 million, up 10% quarter-on-quarter and 34% year-on-year.
Let me give you a breakdown of wireless revenues for the first quarter:
SMS revenues increased 13% sequentially to $4.7 million after certain technical problems with one of the operator were resolved in the previous quarter.
WAP revenues grew 12% sequentially to $2.5 million, mainly due to product enhancement and better ranking on the Monternet platform.
MMS, IVR and Ring Back Tone services accounted for $0.8 million in total as compared to $0.9 million in the previous quarter.
3. Other revenues:
Our other revenues mainly included online game revenues which grew 23% sequentially and 54% year-on-year to $2.1 million. The growth was primary driven by the increase of sales of virtual goods in the games.
II. Turning to our gross margins:
Starting from January 1, 2006, share-based compensation expenses are charged to cost of revenues and operating expenses following the adoption of Statement of Financial Accounting Standard 123R. Total share-based compensation expenses for first quarter was $1.7 million. We believe excluding such expense from our non-GAAP financial measure of net income makes a more meaningful comparison of our operation results and improve users understanding of our performance, hence we use non-GAAP measures below to explain margin, cost and expense items.
Overall non-GAAP gross margin for the first quarter was 66%, unchanged from 66% in the previous quarter and down from 68% in the first quarter of 2005.
Advertising non-GAAP gross margin was 75%, up from 74% in the previous quarter, but down from 78% in the same period last year. Brand advertising non-GAAP gross margin was 76%, up from 75% in the previous quarter but down from 77% in same period last year. Sponsored search non-GAAP gross margin was 69%, up from 68% in the previous quarter but down from 82% in the same period last year.
Non-advertising non-GAAP gross margin was 51%, an improvement from 50% for the prior quarter, but down from 52% in the first quarter of last year.
III. Operating expenses
For the first quarter, Sohus non-GAAP operating expenses totaled $13.0 million, down 9% from previous quarter but up 20% year-on-year. The quarter-to-quarter decrease was primarily due to a one time accounting adjustment regarding an accrual of sales commission during 2005 Q4. Year on year increase primarily related to costs associated with our Olympics sponsorship role and personnel costs.
IV. Operating Margin
Non-GAAP operating margin for the first quarter was 25%, up from 19% in the previous quarter and 23% in the same period last year. GAAP operating margin for the first quarter was 19%.
V. Income tax expense
Starting 2006, the applicable PRC income tax rate for most of our operating entities in the PRC have increased to 7.5%, due to the expiration of income tax holiday. For the first quarter, income tax expense totaled $0.4 million.
VI. Net Income
Non-GAAP net income for the first quarter was $7.8 million or 20 cents per fully diluted share. This compares to net income of $8.9 million or 23 cents per fully diluted share for the previous quarter and $5.7 million or 15 cents per fully diluted share for first quarter of 2005. GAAP net income for the first quarter 2006 was $6.0 million or 16 cents per fully diluted share.
VII. Balance Sheet.
Let me now make a few comments on the Balance Sheet.
As of March 31, 2006, Sohus cash, cash equivalents and investments in marketable debt securities was $137 million, compared to $133 million as of end of last quarter and $129 million as of March 31, 2005.
As of March 31, 2006, our net accounts receivable balance was $24.9 million, an increase of $5.6 million as compared to last quarter. This includes $17.8 million related to our advertising business and $7.1 million related to our wireless business. During the first quarter, we collected sales proceeds totaling $15.5 million for our advertising business. Our DSO for the first quarter was 76 days compared to 62 days in the previous quarter. First quarter advertising DSO was 89 days, compared to 77 days for the fourth quarter. Because we typically receive advertising sales proceeds from third party advertising agencies in the second and fourth quarters based on agency contracts, we normally have higher advertising DSO in the first and third quarters. We continue to closely monitor our accounts receivable.
As of March 31, 2006, our bad debt provision amounted to $1.5 million, compared to $1.2 million as of December 31, 2005. While we consider this level of bad debt provision to be still relatively low as compared to our level of advertising sales, we continue to remain prudent in our revenue recognition policy and strengthening our credit extension.
VIII. And finally, our Business Outlook
You will find detailed guidance for the second quarter 2006 in our earnings release, but I would like to highlight:
In summary, we are pleased with our first quarter 2006 results and believe we are well positioned for further growth. Our healthy brand advertising business combined with a steadily improving search product further supplemented by stable growth on the
wireless side are all positive factors as we look ahead. We view the World Cup as a near term growth driver and the Olympic sponsorship as a longer term growth catalyst. We strive to brand Sohu as a leading online international sports content provider and global online news and entertainment provider.
We look forward to providing everyone with more updates of our successes for the remainder of 2006 and take this opportunity to thank everyone for their interest and continued support in Sohus vision.
That concludes my presentation. Thank you for your attention. I would like to now open the floor for questions. Operator?
Ingrid- Closing Remarks
We would like to thank everyone for participating in todays call. Please feel free to contact us with any additional questions that you may have. Thank you.