Inc. Earnings: Margins Keep Shrinking as Net Income Drops

Rising costs hurt Inc. (NASDAQ:SOHU) in the fourth quarter as profit dropped from a year earlier. is an Internet company that, through its subsidiaries, provides online products and services with news, information, entertainment and communication in China.

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Results: Net income for Inc. fell to $26.9 million (65 cents per share) vs. $44 million ($1.07 per share) a year earlier. This is a decline of 38.9% from the year earlier quarter.

Revenue: Rose 42.2% to $246.2 million from the year earlier quarter.

Actual vs. Wall St. Expectations: Inc. reported adjusted net income of $1.36 per share. By that measure, the company beat the mean estimate of $1.23 per share. Analysts were expecting revenue of $242.4 million.

Quoting Management: Dr. Charles Zhang, Chairman and CEO of Inc. commented, “We are pleased to report a strong fourth quarter that helped us finish a solid year for 2011. For online advertising, our conscientious efforts in growing online video and search businesses are bringing strong growth in revenues, users and traffic. These businesses, along with our portal business, are contributing to give the Sohu Group a powerful integrated online marketing platform. In 2012, we aim to make this platform even more dominant in China’s internet market.”

Key Stats:

The company has enjoyed double-digit year-over-year percentage revenue growth for the past five quarters. Over that span, the company has averaged growth of 36.5%, with the biggest boost coming in the most recent quarter when revenue rose 42.2% from the year earlier quarter.

Last quarter’s profit decrease breaks a streak of four consecutive quarters of year-over-year profit increases. In the third quarter, net income rose 14.2% from the year earlier, while the figure increased 32.3% in the second quarter, 48.4% in the first quarter and 35.9% in the fourth quarter of the last fiscal year.

Last quarter marked the fifth straight quarter that the company saw shrinking gross margins as gross margin fell 2.5 percentage points to 71.3% from the year earlier quarter. Over that time, margins have contracted on average 1.5 percentage points per quarter on a year-over-year basis.

The company has now topped analyst estimates for the last four quarters. It beat the mark by 3 cents in the third quarter, by 4 cents in the second quarter, and by 4 cents in the first quarter.

Looking Forward: Analysts have a positive outlook for the company’s performance next quarter. Over the past seven days, the average estimate for the first quarter of the next fiscal year has gone up to $1.16 a share from $1.15. The average estimate for the fiscal year has seen a bump from $4.58 per share sixty days ago to $4.59.

(Company fundamentals provided by Xignite Financials. Earnings estimates provided by Zacks)

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To contact the reporter on this story: Derek Hoffman at

To contact the editor responsible for this story: Damien Hoffman at