Sohu.com - Earnings Call - Q1 2019

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and good evening. Thank you for joining Sohu's First Quarter twenty nineteen Earnings Conference Call. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded.

If you have any objections, you may disconnect at this time. And I'd like to turn the conference over to your host for today's conference call, Mr. Eric Grann, Investor Relations Director of Sohu. Please go ahead, sir.

Speaker 1

Thanks, operator. Thank you for joining us today to discuss Sohu's fourth quarter twenty nineteen results. On the call, our Chairman and CEO, Doctor. Charles Zhang CFO, Joanna Li. Also with us today are Changyou's CEO, Dolan Chen and CFO, Yao Bin Wang and Sogou's CEO, Xiaochuan Wang and CFO, Jojo.

Before management begins their prepared remarks, I would like to remind you of the company's Safe Harbor statement in connection with today's conference call. Except for the historical information contained herein, the matters discussed in this conference call are forward looking statements. These statements are based on current plans, estimates and projections, and therefore, you should not place undue reliance on them. Forward looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward looking statement.

For more information about the potential risks and uncertainties, please refer to the company's filings with the Securities and Exchange Commission, including its registration statement and most recent annual report on Form 20 F. With that, I will now turn the call over to Doctor. Charles Zhang. Charles, please proceed.

Speaker 2

Thanks. Thank you everyone, for joining our call. In the first quarter, we delivered better than expected revenue, mainly driven by the solid performance of our search and game businesses. Sohu Media continued to make progress upgrading its products and content on our platform, and we explore new ways to diversify revenue sources. Sohu Video consistently offered appearing self developed dramas and its financial loss kept narrowing due to strict cost controls.

And Sogou, the user base of its mobile search and keyboard products further expanded, while its course search revenue grew faster than imagery. In the first quarter, Changyou's revenue and profit exceeded guidance as TLBB PC game performed very well during the Chinese New Year's holiday. Before I go into more detail about our key business, let me summarize our financial results for the first quarter. First quarter total revenues, $431,000,000 down 5% year over year and 11% quarter over quarter. On a constant currency basis, total revenues would have been $26,000,000 higher than our reported revenues, so up 1% year over year.

Net brand advertising revenues, dollars 43,000,000, down 24% year over year and 25% quarter over quarter. Search and search related advertising revenues, dollars $234,000,000, up 6% year over year and down 15% quarter over quarter. Online game revenues, 99,000,000, down 6% year over year and up 5% quarter over quarter. Excluding certain noncash impairment charges, the operating loss for Sohu Video was $27,000,000 compared with a loss of $48,000,000 in the first quarter of twenty eighteen. GAAP net loss attributable to Sohu dot com Limited was $57,000,000 compared with a net loss of $93,000,000 in the first quarter of twenty eighteen.

Non GAAP net loss attributable to sohu dot com Limited was $55,000,000 Excluding the effect of the impairment charge, net of tax effects, non GAAP net loss attributable to sohu dot com Limited was $48,000,000, which compared with a net loss of $97,000,000 a year ago, the first quarter of twenty eighteen. Excluding Sogou and Changzhou, the non GAAP net loss attributable to our core silhou.com business, basically, media and video business, was year was $72,000,000, which compares with a net loss of $93,000,000 in the first quarter of twenty eighteen. And for the first time, are going to for the forecast, we will forecast this non GAAP net loss actually to civil civil civil business. And in general, we'll have business outlook. Now let me go through some of the key businesses.

Speaker 1

First of all,

Speaker 2

our media portal business. In the first quarter, we to improve user stickiness, we continue to focus our efforts on improving our products and technology and up upgrading the content on our platform. We deepen our partnerships with high quality con content providers, encouraging them to create in-depth articles on hot topics in an effort to increase user engagement. So the total number of articles posted by third party writers or, so called, Sohu Haul grew by 10% quarter over quarter. On the product side, we are developing compelling social features for our Sohu News app.

These features aggregate coverage of different important events, such as breaking news and social topics and product launches. Along with our users can browse over the stories in a one stop way nonstop a one stop way, we can also conveniently make comments and share thoughts with peers. We believe upgrades such as this will make our news app not just an information distribution platform, but also a more engaging product. Financially, while the first quarter always tends to be a seasonally soft quarter. The sluggish and also the sluggish economic environment continue to impact our ad revenues.

However, we worked hard to elevate elevate the negative pressure. For example, we are creating more customized solutions for our key advertising clients. In early, April, we successfully hosted a celebrity off road marathon event in Tungi, Hubei Province where the next Winter Olympic Games will be held. The event attracted a good number of sponsors and helped to elevate the Sohu News brand. We've also been cultivating more local partners in lower tier cities to better monetize our traffic.

Overall, we expect a 20% plus revenue rebound in the second quarter compared with the first quarter. Now, so for video. 02/2019, we continue to implement what we call the two engine strategy for our content offering. On one hand, it's primarily we primarily focus on developing and producing original content, the long clips, long video, long clips, original content. We're also enhancing the the short form short clips, user know, the UGC, user generated content, and its distribution.

So this is two engine strategy. We believe this combination should enable us to provide users with interesting content at a much lower cost, and this will likely help our video business achieve profitability eventually. For the self developed shows, our com shows, we have built a impressive track record in two categories in particular. One is the idle idle romance category. The other one is the criminal theme, the drama.

So in the first quarter, our idol romance drama, called, Well Intended Love became a web sensation upon its debut. It hit an, a hot search list on Weibo 30 times during the broadcast period. Total video views reached 1,000,000,000. Look ahead, we'll mainly use our in house artists and focus on producing high quality content with low to mid range budgets. Besides Sohu Originals, we're also exploring opportunities in short video categories, especially UGC, leveraging our cross platform advantages.

UGC videos can be more efficiently distributed across a number of Sohu family platforms, such as news, live broadcast, games, and search. So in the first quarter, benefiting from the fixed cost controls, we were able to further narrow the financial loss at Sohu Video. Operating loss was $27,000,000 which was 10% less than the previous quarter and 43% less than the same period last year. Now turning to Sogou. In the first quarter, Sogou's two key products, search and mobile keyboard, both demonstrated healthy growth, leveraging our innovative AI technologies.

As the, number two search engine, Sogou's core search revenue continued to outpace industry growth. By end of by the March, Sogou Mobile Keyboard's DAU, reached 443,000,000, up 23% from a year ago, becoming the third largest mobile app in terms of DAU in China, according to iResearch. Lastly, Changyou. In the first quarter, Changyou revenues and profits came in ahead of our expectations. In particular, its PC game revenues rose significantly on a sequential basis.

Changyou launched a new expansion pack for the spring festival as well as a variety of online and offline events for the holidays and received warm response from gamers. Looking out at 02/2019, we'll continue to execute our strategy of top games and improve our capabilities and efficiency in game development. MMORPG mobile games will continue to be our strategic focus, while we are also developing a number of casual games and strategy games. With the support of strong cash flow, we believe Changyou is well positioned to roll out new hit games in the future. Now let me turn to Joanna, our CFO, who will talk you through our financial results.

Joanna?

Speaker 3

Thank you, Charles. I will walk you through the key financials of our four major segments for the first quarter of twenty nineteen. All of the numbers that I will mention are all on a non GAAP basis. For social media portal, quarterly revenues were $23,000,000 down 26% year over year. The quarterly loss was $35,000,000 which compares with a net loss of $29,000,000 in the first quarter of twenty eighteen.

For Sohu Video, quarterly revenues were $26,000,000, down 16% from a year ago. Of this, advertising revenues were $10,000,000. Excluding impairment charges, the operating loss for Sohu Video was $27,000,000, which compares with a net loss of $48,000,000 in the same quarter last year. For Sogou, quarterly revenues were $253,000,000 up 2% year over year and down 15% quarter over quarter. Net loss was $3,000,000 compared with net income of $20,000,000 in the same quarter last year.

For Changyou, quarterly revenues, including $1.07 $1.07 3, were a $123,000,000, down 10% year over year and up 5% quarter over quarter. Changyou posted net income of $37,000,000 compared with net loss of $60,000,000 in the same quarter last year. For the second quarter of twenty nineteen, we expect total revenues to be between $469,000,000 and $494,000,000 grand advertising revenues to be between $47,000,000 and $52,000,000 This implies annual decrease of 15% to 24% and a sequential increase of 9% to 21%. Sogou revenues to be between $303,000,000 and $313,000,000. This implies annual increase of 1% to 4% and a sequential increase of 20% to 24%.

Online game revenues to be between $90,000,000 and a $100,000,000. This implies annual decrease of 5% to annual increase of 6% and a sequential decrease of 9% to a sequential increase of 1%. Non GAAP net loss attributable to sohu dot com Limited to be between $38,000,000 and $48,000,000, and non GAAP loss per fully diluted ADS to be between 95¢ and a dollar and 20¢. GAAP net loss attributable to sohu dot com Limited to be between $40,000,000 and $50,000,000, and GAAP loss per fully diluted ADS to be between a dollar and a dollar and 25¢. Excluding profit generated by Sohu and Changyou, non GAAP net loss attributable to sohu.comlimited to be between $65,000,000 and $70,000,000.

GAAP net loss attributable to sohu.comlimited to be between $67,000,000 and $72,000,000. For the second quarter of twenty nineteen guidance, we used a presumed exchange rate of RMB 6.8 to $1, which compares with the actual exchange rate of around RMB 6.38 to $1 for the second quarter of twenty eighteen and RMB 6.74 to $1 for the first quarter of twenty nineteen. With that, this concludes our prepared remarks. Operator, we would now like to open the call for questions.

Speaker 0

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. The first question comes from the line of Alicia Yap from Citigroup.

Ask

Speaker 1

your question.

Speaker 4

Hi, good evening, Charles, Joanna and other management. Thanks for taking my question. I have a couple of questions. Number one is what are the plans for the use of cash from the special dividend that received on Changyou? Second question is what is the impact to SoHo videos on the recent regulatory restrictions on broadcasting the costume drama?

Any other content restriction that you foresee could be introduced later this year? And then just lastly, quickly, it's related to Changyou. On the Changyou call earlier, the management mentioned about the NetEase game Ancient Mountain. They are Chengdu is licensing from NetEase to publish in Korea. So just wonder why NetEase would license that game rather than not publishing themselves.

Thank you.

Speaker 2

Okay. The use of cash, right, is on the dividend. Well, yes, the on on a cost level, we were still at a loss and and still burning cash. Right? So we'll continue we need to spend money on the the news apps, the channels, and all the product and technology development.

And, you know, so it's and also video video. So that's in many places, we use the cache, but we'll just use it really diligently and and make sure that we'll narrow continue to narrow, narrow the, the loss so that we'll have a, you know, pretty, plenty of rooms on the ground to move forward. The regulation on custom drama, it's actually not much issue restriction, right, on the custom drama. And that's one, it's not not it's just there's no such a regulation. They should have talked about it, but never, you know, post you know, actually carried out.

And also, for those who's how can in house self introduced dramas, we tend to, to have to to have drama for modern, you know, you know, modern, you know, not the ancient stories, but the modern times. So that we have a have a lot of opportunities to to have the embedded advertising, like a like a cars, automobiles, or mobile phones and all all these kind of, commercial, I mean, commercial, items that embedded in in in the story. For the for the ancient customer dramas, we don't have a lot of opportunities for to to do that. So that's the timing. So the the question about China.

Right? To change the

Speaker 5

relatively close, the cell. So it's easy to cooperate with each other. They're running business overseas. It's but we are especially doing good in Korean market. On the side, actually, we have been keep very good relationships with both, like, Tencent and Adi for some IP or logo or brand with Vectrus.

We also give the we also authorized them to use those. So it's good for us. Yeah.

Speaker 4

Okay. Thank you.

Speaker 0

Thank you.

Speaker 5

So I'm trying to

Speaker 2

process this.

Speaker 0

The next follow-up question comes from the line of Alicia Yap from Citigroup. Please go ahead.

Speaker 4

Hi. Sorry. Thanks. Have one follow-up question, if I may. Actually, I wanted to know, I know this April period, the whole industry are kind of like closing, signing up of most of the framework contract.

So just wonder if management see what is Sohu's demands, right, from the app budget side? And then also any change in terms of the different industry vertical that if you can share the color?

Speaker 2

Well, it's a there's a in the auto industry, there's a mixed and it's mixed, you know, mixed signals. Some of those imported cars, automobile, especially U. S. Or European brand seems suffering, but the Japanese brand seems and also German brand is doing better. And yeah, the Japanese brand.

Yeah. So in other industries, there's generally kind of weak yeah, weak time spending, weaker. But it makes for some spending construct. Yeah. But the yeah, exactly.

The surge or the in the liquor business, right? Yeah. The Chinese liquor business. Coming up. And also, what's kind of the when you saw them before?

You saw the movie, consumer growth, cosmetics, medical, paramedical or something, those kind of we found the the the Micro merchant. Micro merchant through WeChat and other. Those are where we're coming from. So you're always advertising, always have economic downturn, you If you always see some of those traditional industry factors are kind of showing, the weak showing. But then you'll always have big China has, you know, so many people think that there's always manufacturers that suddenly show up, right, showing.

Speaker 3

Okay. All right. That's helpful. Thank you, Charles.

Speaker 2

Alright.

Speaker 0

Thank you once again, ladies and gentlemen. To ask a question today, please press dial 1. All right. Thank you. So there are no further questions at this time.

And ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.