SOHU (SOHU) Q3 2025: Online Games Surge 53% QoQ, Offsetting Ad Weakness
SOHU’s third quarter saw a dramatic surge in online game revenue, far outpacing expectations and driving the company to positive net income. The core gaming portfolio’s outperformance masked persistent softness in marketing services, as macro ad headwinds continued. Management’s Q4 guide signals a normalization in gaming and a cautious outlook, with innovation in content and product integration remaining central to the company’s forward strategy.
Summary
- Gaming Revenue Spike: Online games drove outperformance, with operational leverage and new launches fueling margin expansion.
- Advertising Remains Subdued: Marketing services lagged, with macro softness and sector-specific ad budget cuts weighing on results.
- Q4 Signals Reversion: Guidance points to gaming normalization and continued ad market caution, despite content innovation efforts.
Performance Analysis
SOHU’s Q3 was defined by a sharp divergence between its two core segments: online games and marketing services. Online game revenue, which now represents the overwhelming majority of SOHU’s business, surged on the back of new title launches and strong in-game monetization, particularly from the TLBB franchise. The gaming segment’s 27% year-over-year and 53% sequential growth drove operating profit expansion and enabled a return to positive net income, reversing losses from both the prior quarter and the previous year.
In contrast, the marketing services business continued to shrink, with revenue down double digits both year-over-year and sequentially. Management attributed this to ongoing macroeconomic weakness, sector-specific ad budget pressures (notably in auto and IT services), and the company’s relatively small ad base. Despite these challenges, SOHU’s innovative event-driven campaigns and unique content offerings provided some stabilization, though the rebound remains modest in scale.
- Gaming Margin Expansion: Operating profit in the gaming segment climbed sharply, reflecting both top-line growth and disciplined cost management.
- Content-Led Platform Growth: The social media segment leveraged offline and online events to drive user engagement, but remained loss-making, with operating loss largely unchanged year-over-year.
- Share Repurchase Progress: SOHU has completed two-thirds of its $150 million buyback, signaling commitment to capital return amid earnings volatility.
The quarter’s results highlight SOHU’s growing dependence on its gaming business for both revenue and profitability, while underscoring persistent challenges in achieving scale or profitability in its social media and advertising operations.
Executive Commentary
"Both our online game revenues and the bottom line performance benefiting from our continuous efforts in the gaming business were well above our prior expectations. We recorded positive net income this quarter."
Dr. Charles Zhang, Chairman and Chief Executive Officer
"For social media platform, quarterly revenues were $70 million compared with $23 million in the same quarter last year. Quarterly operating loss was $71 million compared with operating loss $72 million in the same quarter last year. For Chang You, quarterly revenue $163 million compared with $129 million in the same quarter last year. Quarterly operating profit was $88 million compared with operating profit $62 million in the same quarter last year."
James Dunn, Vice President of Finance
Strategic Positioning
1. Gaming as Core Profit Engine
Online games, especially the TLBB franchise (a massively multiplayer online role-playing game, or MMORPG), have become SOHU’s primary revenue and profit driver. The launch of TLBB Return and the strong performance of TLBB Vintage servers exceeded expectations, with higher-than-anticipated user spending and retention. Management emphasized a “top game” strategy, focusing on deepening IP value, regular content updates, and diversifying into new genres—including card-based RPGs and sports games—to sustain engagement and unlock new monetization streams.
2. Adapting Social Platform for Monetization
The SOHU social media platform continues to experiment with product integration and event-driven content to build user engagement and foster a differentiated ecosystem. Management highlighted the use of both online and offline events, such as influencer conventions and themed competitions, to generate premium content and attract traffic. However, the segment remains structurally loss-making, and while unique IP (such as Charles’ Physics Class) drives some monetization, scale and profitability remain elusive.
3. Navigating Advertising Headwinds
Marketing services revenue remains under pressure due to macroeconomic softness and sector-specific weakness, especially in auto and IT services. SOHU’s response has been to lean into unique, event-driven campaigns and leverage its social platform’s differentiated content to attract advertisers. While this has stabilized the ad business at a small scale, the segment’s contribution to overall results is limited, and management remains cautious on near-term ad market recovery.
4. AI as Productivity, Not Platform, Lever
SOHU is not investing in proprietary large language models, instead applying AI for incremental productivity gains—summarizing video content, auto-generating subtitles, and enhancing search and Q&A features. In gaming, AI is used for art design, code generation, and game planning, but thus far, these are efficiency plays rather than major revenue drivers.
5. Capital Allocation and Shareholder Returns
The company has repurchased 7.6 million shares for $97 million, completing two-thirds of its $150 million buyback program. This signals a willingness to return capital amid volatile earnings and underscores management’s confidence in long-term value, even as near-term guidance points to normalization.
Key Considerations
SOHU’s Q3 results reinforce the company’s strategic pivot to gaming as its core value proposition, while exposing the fragility of its advertising and social media businesses. The following considerations frame the quarter’s context:
Key Considerations:
- Gaming Outperformance Is Episodic: The Q3 surge was driven by new launches and promotional activity, but Q4 guidance points to a significant sequential decline as initial launch momentum fades.
- Ad Revenue Remains Structurally Weak: Despite innovative campaigns, macro and sector headwinds continue to limit ad growth, with management signaling only modest stabilization at a small base.
- Social Platform Lacks Profitability: User engagement initiatives and content innovation have yet to translate into operating leverage or material monetization.
- AI Investment Is Tactical, Not Transformative: SOHU’s use of AI is focused on cost and productivity improvements, not on building platform-level differentiation or new revenue streams.
- Capital Return Signals Confidence: The aggressive buyback pace reflects management’s belief in the value of the gaming franchise, but also highlights a lack of compelling reinvestment opportunities in other segments.
Risks
SOHU faces several material risks: Gaming revenue is highly dependent on episodic launches and in-game events, leading to volatility and limited visibility. Ad market weakness may persist or worsen if macro conditions deteriorate further, while the social platform’s losses could widen absent a path to scale or monetization. Heavy reliance on the TLBB franchise exposes the business to IP concentration risk, and AI investments, while helpful for efficiency, do not address these structural challenges.
Forward Outlook
For Q4 2025, SOHU guided to:
- Marketing services revenue of $15 million to $16 million, a sequential increase but down 15% to 20% year-over-year
- Online game revenue of $123 million to $130 million, a sequential drop of 24% to 30% but up 3% to 12% year-over-year
- GAAP and non-GAAP net loss of $25 million to $35 million
For full-year 2025, management did not provide explicit guidance but signaled continued caution due to macro uncertainty and the episodic nature of gaming launches.
- Gaming normalization is expected after the Q3 surge, with revenue reverting to more typical levels absent major new launches.
- Advertising stabilization is likely to remain at a low base, with upside limited by sector headwinds and macro conditions.
Takeaways
SOHU’s Q3 demonstrates the power and volatility of a gaming-led model, with episodic launches driving outsized results but lacking long-term visibility. The social platform and ad business continue to lag, with innovation unable to offset structural and macro headwinds.
- Gaming Drives Value, But Is Volatile: The company’s fortunes are increasingly tied to the success and cadence of new game launches and in-game monetization events.
- Ad and Social Remain Challenged: Despite creative efforts, these segments are unlikely to drive near-term growth or profitability.
- Future Focus on Gaming Pipeline and Monetization: Investors should watch the pace and success of new gaming titles and content updates as the key forward driver.
Conclusion
SOHU’s Q3 was a showcase for its gaming franchise, with new launches delivering a temporary profit surge and offsetting persistent ad and social platform headwinds. Looking ahead, the company’s ability to maintain gaming momentum and convert platform innovation into monetization will determine its long-term trajectory.
Industry Read-Through
SOHU’s quarter offers a clear read-through for the broader Chinese gaming and digital media sector: episodic title launches can drive dramatic but unsustainable revenue spikes, underscoring the need for a robust and diversified pipeline. Macro-driven ad weakness remains a drag across the industry, with even innovative content strategies providing only limited relief. Companies overly reliant on single IPs or segments face heightened volatility, while tactical AI adoption is unlikely to drive structural change without deeper platform investments. Investors in the space should focus on portfolio depth, monetization innovation, and capital allocation discipline as key differentiators going forward.